The Russian invasion of Ukraine has united much of the Western world against President Putin, and we can only hope for a swift and peaceful resolution to the conflict that results in Ukrainians returning to their homes.
It does feel awkward at times to be talking about elements of our lives that seem inconsequential compared to the life and death situation facing Ukrainians but as independent financial advisers it is our duty to interpret events and communicate the consequences to our clients, so we will continue to do so.
It is impossible to ignore the impact of collective sanctions on Russia on the global economy now. The price of Brent Crude has touched levels not seen since early 2013 while the cost of a litre of fuel has breached the £2 a litre barrier at the pumps in some areas of the UK.
The price of wheat futures has only been higher once in the last 25 years (back in February 2008) and it has doubled in price in the last twelve months.
These are tough times for consumers as these goods are essentials and pressure will mount on the Government to do more to alleviate the burden facing households.
Since we published an article on inflation last month when inflation was 5.5%, predictions for the UK rate of inflation have grown further and predictions of 8% in April and potentially higher in October have emerged, exacerbated by the war in Ukraine.
At times like this, it is more important than ever for your finances to be working hard for you. Cash might look safe at the moment as markets appear volatile but as inflation climbs away, its real value diminishes faster. Long term investments are still likely to be the most suitable vehicle for long term financial goals. Similarly, selling investments now and trying to buy back in later relies on one being able to accurately time the market, which has proven to be very difficult in the past.
At the time of writing, the Russian stock exchange is yet to re-open and the prospect of a default looks likely. Russian citizens are feeling the pain, as are oligarchs as their assets are frozen.
The sanctions imposed have been welcomed by voters to this point and Boris Johnson has made no secret of the fact that enforcing them will result in pain for Britain.
As a result of some sanctions, oil-producing countries have found their phones to be busier than usual as the rest of the world tries to ensure shortfalls in production can be made up elsewhere.
This geopolitical motivation and the rising cost of household energy has given urgency to the argument for speeding up the transition to green energy in recent weeks. It has also sharpened focus on the ESG sector for its exposure to the Russian state and state-directed organisations.
The ESG position
In an article in the Financial Times recently, Ukraine’s former Finance Minister, Natalie Jaresko, challenged corporate leaders to walk the walk on Environmental, Social, and Governance (ESG) and “take actions consistent with their ESG policies”.
Corporations are walking Mrs Jaresko’s walk and exiting Russia as they start to feel the bite of sanctions (and the ethical issues of operating inside a country that is invading another) so the exposure through association will continue to reduce.
For our part, we found seven clients (out of thousands) invested in funds with concentrated investments in Russia and those funds are currently suspended. Outside of that, we found exposure through multinationals, who in common with many global organisations, operate in Russia. They are part of many portfolios, although that situation is changing very quickly.
King & Shaxson, one of our ESG investment partners explains how the situation has impacted their portfolios but given them reasons to be optimistic:
The geopolitical tensions have brought energy into the spotlight. It has highlighted the necessity to move away from fossil fuels, firstly due to the sharp rise in price and need for alternatives, but also to avoid reliance on nations like Russia, which can make the supply of energy a political issue.
As a result, we expect further support from governments to transition quickly, which is an obvious plus for our portfolios. Today (8th March 2022), we have seen the European Union unveil plans to jointly issue bonds on a potentially massive scale in order to finance amongst other things, energy. Whilst the plans are yet to fully come out, we expect this to be supportive of renewable energy.
We mentioned at the end of February that we are already seeing investments in renewable energy react positively. Take Orsted for example, the owner and operator of offshore wind farms (held in model portfolios). The stock has risen almost 30% over the last month (to 8th March 22), on the expectation renewables will expand at a faster pace as alternatives are sought.
While ESG portfolios overall have taken a hit in recent months as big tech slid back, the smart money, as ever, is likely to be holding investments for the long term.
The interesting aspect here is whether governments will gamble and invest more in bringing forward green solutions at a time when the cost of doing so comes on the back of the enormous cost of Covid and rising interest rates and inflation, which could curb household spending and subsequently, lower receipts for the Treasury.
The longer President Putin continues his war in Ukraine and the shockwaves are felt by consumers across the world, the stronger the arguments for doing so are likely to become.