Skip to main content Skip to footer

ESG - How does the Ukraine conflict influence decision making and supply chains?

Andrew Milligan has joined with Managing Partner Simba Mamboininga to follow up his previous thought piece regarding the conflict in Ukraine.


Russia’s unexpected invasion of Ukraine created an initial shock wave spiralling through parliaments, financial markets, the media, and company boardrooms.  The largest land war in Europe for 70 years has a multitude of implications. Quite understandably, the initial focus of analysts has been on military developments, the refugee crisis, the aggressive nature of Western sanctions, and the effects of much higher commodity prices on future inflation. In this article we consider some of the ESG implications of the situation in Ukraine.

How corporates responded

After the Western governments launched a stream of rules, regulations and directives against Russia, notably aimed at banks, oligarchs, capital flows and foreign exchange reserves, the corporate sector responded too. Company after company announced that they will be withdrawing from Russia, or shuttering their operations there, or divesting themselves from Russian assets. The list of names grows apace: Apple, BP, Estee Lauder; since the invasion on February 24, more than 330 companies have halted Russian operations, according to Jeffrey Sonnenfeld at Yale.  Even those who have initially resisted the new zeitgeist, such as Uniqlo and BAT, have reconsidered in the face of a mass of complaints from customers, staff, politicians and media. After all, VW boss Herbert Diess, has warned that the economic damage for Europe from the war in Ukraine could be worse than from the pandemic. On top of the well-known threats to supplies of oil and gas, wheat and nickel, marine transport could be seriously disrupted (Ukraine and Russia account for 14 per cent of commercial seafarers).

Getting on the right side of public opinion or ensuring that the CEO has a good story for a Parliamentary Select Committee is well and good. However, Russia’s invasion of Ukraine raises rather more serious concerns for senior management, whether in commercial operations or asset managers. They can be summed up by these simple questions: is the board of directors merely jumping on a bandwagon, admittedly protecting the company’s long-term interests, or is this a sea change in the way that ESG is moving front and foremost onto the board agenda? How much emphasis should be placed on ethics, how much on logistical problems, how much on legal risks as the motivating factor?

S as well as E and G

The war in Ukraine may well encourage senior management to focus rather more equitably on S as opposed to E and G matters. Corporate governance, for example CEO pay, was the bread and butter of stewardship matters for many years. In 2021, there was a welcome development whereby more firms realised that E, environmental issues, especially climate change and biodiversity, needed to be included more fully in their business models.  The obvious example is the number of companies who signed up for carbon neutral targets around the time of the COP26 conference. However, S, the social aspects of ESG have rather been played down - until the Ukraine war brought them to the forefront. Whether corporates would have preferred to stay operational in Russia, or maintain Russian supply chains, it was clear that western businesses viability would suffer if they chose to maintain presence in Russia or have any association with it too. This single event has cast social considerations on corporate affairs at the apex of decision making, alongside the environmental issues which corporates are still becoming attuned to.

Operations and supply chains' footprint

Company boards will now need to decide whether Russia is unique, or whether they should start to consider their operations in other politically sensitive countries as well. After all, Russia is an autocracy and little different to many other autocracies around the world, notably China but also say Myanmar or Saudi Arabia or Venezuela or numerous African countries. During the Covid crisis, many companies realised that they had an array of supply chain problems affecting their operations. The invasion should cause another reappraisal of logistics and suppliers in a wide array of countries. It is not impossible that supplies of goods and services from Russia might be considered in the same light as, say, cotton produced by Uighurs, or blood diamonds from Africa, or cobalt mining in the DRC.

A Financial Times article recently discussed the inescapable logic. If we decide not to invest in Russia, then also “The Chinese market is uninvestable from an ESG perspective,” said Félix Boudreault, managing director of Sustainable Market Strategies, an ESG investment research group. Many of the Chinese companies most popular with investors were subject to strict state controls, said Boudreault, adding that tech and media companies were “extremely vulnerable to the strike of a pen from a Chinese bureaucrat”.

How satisfied are you with your ESG investing approach?

Asset managers and financial services companies also need to consider ESG in a new light. A lack of real appreciation on exposure and impact to social issues when investing meant portfolios were potentially carrying a higher risk than desired! Treating ESG as a box ticking exercise allowed many portfolios to hold Russian assets. Selling them now equates to shutting the stable door after the horse has bolted. Russia’s ambitions towards Ukraine have been apparent since the Crimea invasion of 2014, indeed it could be argued since Russia’s invasion of Georgia in 2008. Does it take the breakdown of diplomacy and the start of a conventional war to force a fund manager to divest itself from a country’s bond and stock markets?

The issues are complex, and the sums involved are large; Blackrock has reportedly lost roughly $17 billion on Russian securities, Unicredit faces a bill of up to $8 billion and Pimco up to $3 billion. Are recent credit rating agency downgrades of Russia of much use when the market has already priced in a default on Russian external debt? Similarly, a retail or institutional investor needs to consider whether the ‘sustainable’ fund they bought last year has performed well in the light of volatility sparked by the Russian war. Investment managers should also be thinking about what message they will pass to investors in funds that are meant to consider social issues in decision making. Did the investing process fail for these funds?

E for Ethics?

War in Ukraine raises a final issue. How far does ESG equate with morals? It need not; many investors (rightly or wrongly) regard their investment decisions as morally neutral. However, the long history of the green and ethical investing fraternity demonstrates how faith based investors wanted to ensure that their investment process included a variety of moral issues and positions. Are Boards dis-investing from Russia today only because of commercial risks, or to protect the bottom line, or is there a moral element behind their decision as well?


The law of unintended consequences is powerful. Many CEOs may have decided that too many stakeholders would be upset if the company continued its operations in Russia. However, once a company has decided to protect its name and reputation by not investing in one country, then questions will be asked about why it is still operating in others.  The pressures are growing on companies to make consistent, principled choices. Stakeholders have even more encouragement to test company boards about the ESG decisions which they are taking. Government and companies will need to rethink their supply chains and remove the risk of a concentrated point of failure. This might put a spotlight on China given the heavy global reliance on its manufacturing and processing capabilities or various ‘sensitive’ emerging economies which produce essential raw materials. Whether this reliance poses a threat is an important issue to examine and decide upon.



Delivering a 360° service to the asset management industry

Devlin Mambo

We may use cookies to collect data and improve the performance of this website. For further information, please see our Privacy Policy.