The Russian invasion of Ukraine impacted your entire global investment community. The effects are obvious: increasing volatility on the stock and commodity markets in addition to rising inflation. But there are also more subtle effects: the war has forced investment professionals to navigate complex gray areas where their decisions could also be legal from a regulatory perspective but questionable from an ethical perspective.
The Russia-Ukraine war isn’t the primary conflict to affect the financial industry in this manner, but it surely has modified the truth on the bottom for practitioners. The investment community must recognize this and act accordingly. The threat of such conflicts and their consequences raise vital questions that we must address as a community.
Should portfolio managers hold stocks of corporations that play a task in military aggression, even when it is totally legal? Should an advisor cut ties with a client who’s directly or not directly involved in such conflicts? Where should the boundaries be drawn?
War-related issues should not unique to the investment career, so the answers to those questions ought to be guided by general moral norms and principles. But there are few phenomena that cause a lot damage to the capital markets or society as an entire.
War poses risks not only to the profitability of the investment industry, but additionally to its popularity and credibility. Financial experts or institutions that support a government in waging war to upend the rules-based world order do little to extend public trust in financial markets or the investment career.
We must pay attention to such risks. The Russian invasion of Ukraine demonstrated that war has dramatic effects that reach far beyond the front line and are difficult, if not not possible, to model. What seemed rock solid can disintegrate in a matter of days. Before the war, Russian stocks were traded on foreign stock exchanges. Many had “buy” rankings from major investment houses. Soon after the Russian attack they were all worthless. Wealthy customers with established relationships had their accounts blocked. Lucrative deals needed to be broken off and firms liquidated. At some point, the market wondered whether the agent banks would transfer Russian government coupon payments to their creditors. A 12 months ago, such concerns would have raised greater than just a few eyebrows. The conflict has modified the investment landscape to such an extent and with such speed that the principles must adapt to stay relevant.
The query is: what should these recent rules appear to be? Now it is time to start out this discussion. Should there be explicit rules requiring investors and institutions to distance themselves from war-related activities under certain circumstances? How about an exclusionary screening approach?
It isn’t easy to seek out common ground on complicated and controversial ethical issues. In fact, there aren’t any perfect solutions to those dilemmas, but that doesn’t suggest solutions aren’t possible. The investment industry could promote an environmental, social and governance (ESG) approach to military conflicts. This could take the shape of guidance on best practices or disclosure of war-related information to current and potential customers. This may include an inventory of portfolio corporations doing business within the aggressor country or a divestment strategy detailing how securities of such corporations can be excluded in the longer term. There is little doubt that further possible solutions will emerge as these discussions progress.
The Russia-Ukraine conflict has shown that the results of major wars are unpredictable and too great to disregard. For this reason, the investment community must come together to develop common standards to be applied when such conflicts break out, with the aim of stopping them from occurring in the primary place.
Let’s start the discussion.
If you enjoyed this post, remember to subscribe.
Image courtesy of GoToVan, licensed under Creative Commons Attribution 2.0 Generic License. Circumcised.
