The Russia-Ukraine war has thrown up several issues around ESG. Given that the EU is neighbour to the warring parties, the impact of war is direct. But the war also has ramifications around the world. So let us look at some implications for ESG.
Emissions: The recent IPCC report highlighted the urgency to reduce GHG emissions stating that the window is “brief and rapidly closing.” The war has made this harder to achieve – all the munitions going off add to GHG emissions significantly. This will make the task of GHG reductions more challenging.
Investments: ESG investments have grown rapidly in the past couple of years. The war has led to a spike in oil prices and windfall gains to many oil companies, and consequently, oil stock has done well. However, with high inflation and investor expectations of higher returns, the lack of oil stocks puts fund managers, particularly growth funds, in a tight spot. This is exacerbated by the need to reduce holdings of Russian stocks in the portfolio.
Energy sourcing: While the EU has been a climate champion, the war has shown some kinks. The high dependence of EU countries on gas is of concern. There are no easy substitutes. While it is easy to say that they should shift to renewables – it requires massive investments and time. The shift is necessary.
Another worrying line of thought is emerging that the European countries might slow on climate change while rejigging their energy sources.
While the impact of war is more direct on the environment, there are implications for social and governance aspects. For example, take the refugee crisis. The refugees will need employment and housing. And, when the war is over, rebuilding will present opportunities and challenges.
Companies will have to deal with high inflation, constrained supply chains, and recovering from pandemic economic consequences on the governance front. As a result, the need to focus on net-zero will become even sharper.