ESG in Times of War and a War on ESG

    Stockholm (NordSIP) – The effects of the Russian invasion of Ukraine will be studied for many years to come. On the sustainability front, one of the consequences of the conflict was to bring up the issue of defence to the forefront of investors’ considerations and lead some to reconsider the appropriateness of treating companies in the security sector as worthy of the label of “sustainable investments”. The issue has continued to gain attention in light of Sweden’s application for NATO membership.

    Such considerations featured prominently during the SkyTop conference on ESG Impact Against the Backdrop of Geopolitics, which took place in Stockholm on Thursday, October 27th. Another bellicose consideration discussed during the conference was the weaponisation of ESG investing as “woke capitalism” in the USA and its incorporation in the country’s polarised political debates.

    Should Defence Companies be Considered ‘Sustainable’?

    Discussing whether defence companies should be embraced as “sustainable investments” during one of two panels on defending democracy, Mikael Karlsson, CEO of MW Group AB, and Daniel Hopstadius, CEO of W5 Solutions AB, both expressed a concern for the financial and philosophical implications of refusing to consider the defence and security sectors as “sustainable”. After all, they wondered, what could be more sustainable than investing in the defence of the democratic institutions and sovereignty that allow us to pursue all our other goals?

    Two other panels attempted to discuss both how institutional investors might be able to invest in security and why the “ESG” label might not be the most appropriate category to pursue those investment goals.

    A panel discussing New Views on Values Investing Moderator brought together investors, producers and purchasers of Swedish defence services. Fredric Nyström, Head of Sustainability and Governance at Sweden’s National Pension Fund AP3, attempted to explain the nuances of this subject. “Russia’s invasion of Ukraine has had a distinct impact on our world. However, we have not changed our stance as a result of the war. It goes without saying that it is the right of any sovereign nation to defend itself. However, sustainable investments and defence investments are investment considerations, not political considerations,” Nyström said.

    At the moment, AP3 explains it “does not invest in companies which do not comply with international conventions and agreements ratified by the Swedish Parliament of which the business model is judged to have too many transitional barriers.” During the panel, Nystrom argued that in the context of the defence industry, this exclusion covers companies involved in the production of controversial or inhumane weapons.

    The relationship of the institutional investor with the defence industry was on display during the conversation that Nyström had with Eva Axelsson, Chief Sustainability Officer and Head of Group Sustainability at Saab. According to AP3’s disclosures, it owns 0.21% of all shares of Saab and the discussion allowed Nyström to explain what a company such as Saab needs to do to qualify for its investments.

    Like all other companies, defence companies have to meet AP3’s sustainability requirements. “We apply the same ESG strategy as in other sectors,” Nyström added. This approach includes a double materiality assessment, both of how sustainability matters affect a company’s performance and position and how the company itself impacts the environment and society. However, Nyström argued that there’s always room for improvement. “We look for efforts towards reducing the flow of illicit arms and corruption.”

    In another panel on ESG Impact Investing Reimagined: Defined Through the Lens of Geopolitics, moderated by NordSIP’s Editor in Chief, Aline Reichenberg Gustafsson, Gunnela Hahn, Head of Sustainable Investment, Church of Sweden, argued that the conversation about sovereigns’ rights to defend themselves is different from investments and ESG.

    A War on ESG

    The other war that was tackled during the ESG Impact Investing Reimagined panel was the ongoing war on ESG, in the context of the USA’s continued political polarisation. “There has been an attack on ESG, [which] has become a very politicised issued in the USA. ESG investors have been labelled ‘Woke Capitalists’,” says Michael Garland, Assistant Comptroller for Corporate Governance and Responsible Investment, Office of the New York City Comptroller.

    Apparently, the term polls very high among centre right-wing voters in the USA, who might care about sustainability but have developed a bias against anything labelled as ‘woke’. However, the war on ESG is not a mere theoretical fact.

    “There are a number of Republican-led states which are cutting their pension funds or their state’s business relationships with financial institutions that have set decarbonisation rules. They are not allowed to underwrite bond issuances for the public sector and their pension funds are not allowed to hire some of these firms as investment managers. I think it is having an impact in the financial community and some of the firms might be starting to walk back some of their commitments,” Garland explains.

    BlackRock in particular has been in the crosshairs because they are so big and so influential, Garland warns, noting that the New York City Comptroller, which effectively manages the fourth largest pension fund in the USA has attempted to be a counterweight to these pressures and has tried to “push BlackRock to honour commitments, which it appears to now be walking back.”

    Another front where the USA also shows resistance is on the right of workers and unionisation. “Unions are not as culturally accepted in the USA as they are here. There’s a reflexive antagonism towards the labour movement. But there’s a new dynamism. Workers at Amazon and Starbucks have recently had some success in organising,” Garland says.

    The focus on the labour front seems to be focused on the hypocrisy of American companies. “US-based multinational companies’ human right statements say that they respect freedom of association. My understanding is that that means that workers have the right to join a union without interference,” Garland explains. However, “companies like Starbucks and Amazon are quite aggressively interfering with their workers’ ability to form a union. They hold ‘mandatory captive audience meetings’ where anti-union consultants are hired to scare workers away from unions,” Garland continues.

    The other front on the war ESG investors are fighting in the USA has to do with negative lobbying. “For a long time, there has been a movement shareholder engagement calling on companies to disclose their lobbying activities and their expenditures, particularly regarding payments made to trade associations that are used for lobbying,” says Cathy Rowan, Director of Socially Responsible Investments, Trinity Health. As companies begin to embrace ESG and corporate social responsibility, sustainable investors are starting to be able to engage on the alignment of lobbying efforts with a company’s stated values. “It’s a governance question. How does the board oversee the lobbying practices and ensure that there’s alignment?”

    Facing the Fire

    In a sense, all these concerns are a sign of the success of the sustainable finance agenda. Clearly, ESG is a significant enough ‘label’ as to attract the jealousy of the sectors it excludes, while simultaneously causing the ire of those social forces entrenched in unsustainable practices.

    Arguably, this should galvanise sustainable investors to continue pushing the ESG agenda forward, improving it and redoubling their efforts where resistance is strongest.

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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