Following Russian President Vladimir Putin’s decision to invade Ukraine on February 24th, and the atrocities committed after the invasion, the question of whether responsible investors (and ESG Funds) should have been invested in Russia, is appropriate and quite timely. Indeed, even before the invasion of Ukraine, Russia was already considered to be governed by an increasingly oppressive dictatorship where there was little respect for human rights and freedom of speech. Although the 1993 constitution declared Russia a democratic, civil law-based state with a republican form of government, where state power is divided among the executive, legislative, and judicial branches, the Russian government’s application of laws, bureaucratic regulations, and politically motivated criminal investigations have resulted in the press being censored and, in many controversies related to the interpretation of the laws.
Investing in a country such as Russia entails many additional risks as the corporate sector tends to become an instrument of an authoritarian system which may do anything to remain in power. The interest of corporate shareholders is usually an afterthought in the eyes of the executive apparatus ruling the country. The concept of ownership is usually secondary to the will of the country’s rulers.
The concept of social investing goes back to the eighteen century when the Quakers prohibited its members from participating in the slave trade. During the same period, John Wesley, the founder of the Methodist movement within the Church of England delivered his sermon “The Use of Money”, which outlined the basic tenets of social or responsible investing: “we ought not to gain money at the expense of life or by losing our souls”.
The recent events have shown that responsible investors should avoid investing in a country governed by an authoritarian system not only for “moral” reasons, but also for the risks of economic and financial sanctions imposed by other governments on the corporations based in that country. As we observe the situation with Russia, any investor exposed with Russian securities is now facing liquidity issues and multiples losses on its Russian investments because of the sanctions imposed by most of the nations in the Western world.
There are many more countries which are either under an authoritarian regime or on the path of becoming increasingly authoritarian because of the actions taken by their existing leaders.
Investors in China have been affected by various decisions of the Chinese government to censor information for political reason. As an example, in 2017 Chinese authorities began to restrict the publishing of children’s books written by foreign authors in order to limit outside influence on society. This led to a significant reduction of the number of children books after the restriction was implemented. And more recently, China’s large technology companies, such as Alibaba, have seen their share prices tumble because of regulatory crackdown from the Beijing authorities and the uncertainty over their status of Chinese companies listed on US stock exchanges.
Another example is in Turkey, where we have seen President Erdogan blurring the line between a democratic and an authoritarian regime. Few would claim today that Turkey’s leader embraces the liberal values of the democratic world. Some of Turkey’s economic policies also have had very negative consequences for investors who were exposed to Turkish investments.
At Clear Skies, we believe it is our duty as portfolio managers to be aware of the risks associated with investments in a country where there is regular contempt for liberalism and the rule of law. We avoid making investments in such countries based not only on “moral” grounds but also on the high investment risks related to the actions of the rulers in authoritarian regimes.