Are Russian divestments ethical or financial? The investment community needs to be honest

What are the implications of the ‘moral case’ on Russia and are investors prepared to accept them?

RI’s voting and engagement expert Paul Verney

A trustee for a large US public pension scheme once told me that the fund he oversaw was able to shed its gun and private prison holdings because, crucially, it wouldn’t impact its returns. The financials had allowed room for what many people would see as the ethically correct treatment of such assets.  

This interview was one of my first as a RI journalist and shortly afterwards, I interviewed a sovereign bond specialist at a big asset manager, who told me that while, of course, it integrated ESG into its analysis, ultimately, no sovereign debt was off limits if it was legal and profitable to invest in. 

The latter’s position struck me at the time – naively – as starkly minimal; legality and profitability being the only dividing lines when it comes to the permissible. But is it all that different from the trustee? The pension fund rid itself of stocks deemed by many to be beyond the pale but only because it cost nothing to do so. It is an odd ethical imperative to do the right thing only under those circumstances.  

These slippery definitions have played a big role in the investor response to Russia’s invasion of Ukraine. The justified outrage at the heinous acts ordered by Putin, and the consequent pledges to divest from Russia have been confusingly framed – and are arguably bad for the reputation of ESG and sustainable finance.  

Speaking on the BBC’s Today radio show days after the invasion, Simon Pilcher, CEO of the UK’s largest private pension fund, the Universities Superannuation Scheme, said that there is “a clear financial as well as a moral case for divestment with respect to our Russian holdings.”

When asked which of the two was the biggest driver, he replied, “I think the two things overlap – morals drive finance. If you are a financial investor and you don’t think about the moral impacts of what you are doing, I think you are both short-sighted and, dare I say it, immoral.” 

Two days after Pilcher raised the “moral case” on Russia, Australia’s federal treasurer, Josh Frydenberg, and the country’s minister for superannuation, Jane Hume, publicly welcomed the decision of some Australian superannuation funds – including Aware, Rest and Cbus – to shed their Russian assets, seeing in those decisions condemnation of the Putin regime. 

“[I]t is important that Australia sends a clear and unequivocal signal that we condemn in the strongest possible terms Russia’s unprovoked and unjustified attack on Ukraine,” they said.  

But beyond referencing the “great human cost” arising from the invasion, Aware discusses its decision to divest in financial risk terms on its website, as does REST and Cbus

What all three investors, and tens more across the globe, did do was make the divestment decision public – something they don’t do with most investment decisions. Gordon Fyfe, the CEO of British Columbia Investments, which also announced its divestment, said it made “an exception” in this instance “given the egregious actions of Russia”. 

The idea that financial decisions can be broadly quarantined from ethical considerations has always troubled me. Conversations in the sustainable finance industry have long been peppered with people proudly insisting “this is about finance; it has nothing to do with ethics”.  

But if investors do want ethics to play a role, or even appear to in their public relations, they must be prepared to be challenged on consistency.  

What about Saudi Arabia, for example? A country engaged in a highly controversial war in Yemen, linked to severe human rights abuses and, not unlike Putin, with the extrajudicial killing of a civilian in another sovereign country. Those issues do not seem to have dented the attractiveness of the bonds issued by the state’s oil & gas giant Aramco.  

Ethics is a messy, contested, and multifaceted thing and if investors do not want to get involved in it there should be clarity on that.  

An ethical choice that is only made when the financials align, is a financial choice first and foremost. The financial risk Russia poses now is so obvious that any divestment surely cannot be viewed as anything but financial.  

Divesting Russia in 2008 when it invaded Georgia or in 2014 when it annexed Crimea and the world did little, that would have been an ethical decision. 

It might be uncomfortable for investors to admit that only financial considerations govern their investment decisions, but that would be a clean, consistent, if unsatisfying, line. Otherwise, they face the real threat of hypocrisy if they cannot justify – beyond profitability – the ethics of their other investments.  

USS’ Pilcher was also asked by the BBC presenter about the potential that people will now look at its next most controversial holding, to which he responded, illuminatingly, that “we’ve always taken responsible investment very seriously, but as we are managing a global portfolio which is committed to paying the pensions of nearly half a million people we need to ensure we can do just that…” – normal service resumed, it seems.