For Investors, Standing Up To Russia Is A Matter Of Principle, Not Return


KYIV, UKRAINE – FEBRUARY 25: People look at the exterior of a damaged residential block hit by an … [+] early morning missile strike on February 25, 2022 in Kyiv, Ukraine. Yesterday, Russia began a large-scale attack on Ukraine, with Russian troops invading the country from the north, east and south, accompanied by air strikes and shelling. The Ukrainian president said that at least 137 Ukrainian soldiers were killed by the end of the first day. (Photo by Chris McGrath/Getty Images)

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We are all saddened and angered by the scenes emerging from Ukraine – most recently the shelling by Russian forces of a maternity hospital in Mariupol. Pictures of pregnant women and newborns being rescued from the rubble will remain with us.

International response to this humanitarian tragedy was almost immediate, mostly in the form of crippling economic sanctions from governments the world over and multinational companies halting business in Russia en masse. Now, institutional investors are considering what they can do to have a real impact. For institutional investors like endowments and pension plans, this is a time to stand on principle.

Divestment is the most obvious approach – and many public funds in the U.S. and abroad have announced plans to sell off their Russian holdings. The rationale for this divestment is critical to its long-term impact.

Country-specific divestment has a clear precedent. In the 1980s, a broad range of investors divested from South Africa and from companies that had not adopted the Sullivan Principles, a code of conduct developed in 1977 to apply economic pressure on South Africa in protest apartheid. At that time, investors recognized that using their beneficiaries’ capital to support the South African economy, and thereby propping up the white minority regime, was indefensible regardless of the returns it generated. Today, keeping money in Russia is similarly immoral.

Instead, some investors are taking an analytical approach to the crisis, incorporating potential impacts of global events on the value of their portfolio holdings. But while Russian markets and assets are frozen, there is little opportunity to act based on traditional investment analysis, and further elimination of Russian securities from key indexes may solidify this position.

However, there will be a temptation in coming days or weeks as Russian assets are available at fire sale prices to buy in, as trading in secondary markets is allowed under U.S. sanctions. Those investors who justify an exit from Russia based on future value may feel comfortably aligned with their fiduciary duty today but will then feel the pressure to reinvest when assets are available at attractive prices. Using valuation to justify a moral decision will not stand the test of time.

Investors are often confronted with varying expectations on challenging issues. Having a clear-eyed view of how to address these issues is critical. In addition to the analytical approach above, there are three distinct ways in which investors can address environmental, societal or geopolitical issues in their portfolios.

The first way is to be silent; investors can decide that a problem isn’t their responsibility, or that there are better ways to address it than through the investment process. For short-term investments in liquid securities, it may be appropriate to be silent on longer-terms issues such as climate change or geopolitical decoupling. However, on Ukraine, investors cannot afford to stay silent.

A catalytic approach is to try to bring about change through engaging with companies or creating new markets. For example, investors with large positions in fossil fuels or other transitioning industries can influence the speed and trajectory of change by having a seat at the table. It goes without saying that engaging with Russia with the goal of effecting change is a non-starter for investors at this stage.

The final option is to adopt a principles-based approach – investing or, in the case of Russia, divesting based on personal, societal, or organizational principles as opposed to economic factors. The goal of divestment is typically to damage a business by raising its cost of capital. The flipside, of course, is potentially raising the return for those who continue to invest in it. Divesting, and forgoing potential returns, raises challenges for fiduciaries. With a clear understanding of the issue, key constituencies typically will support divestment from things that are inherently wrong. The experience in South Africa during apartheid, or the common practice of avoiding tobacco stocks – has paved the way for a principles-based approach in the case of Russia and Ukraine, where right and wrong is extremely clear.

If divestment from Russia makes sense, why not divest from fossil fuels? Institutional investors’ divestment from Russia is just one piece of broader sanctions on a range of Russian products and services. Selling the securities of fossil fuel companies may create a greener portfolio, but is unlikely to create a greener planet. We are not yet prepared to forgo fossil fuels given their importance to sovereignty, prosperity, and human well-being, but by and large we are prepared to forgo Russian products and services. It would be disingenuous to divest from a business’s securities but buy that business’s products.

No investor wants to support Russia’s unprovoked war on Ukraine and the humanitarian tragedy being inflicted on the Ukrainian people. Justifying divestment based on principle rather than dollars and cents will make it easier for investors to own that decision and stand their ground as time passes.

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