Do dictatorships have a place in ESG strategies?

Russia’s horrific invasion of Ukraine has put a lot of attention on ESG funds with Russian exposure. Bloomberg estimates that ESG managers held at least US$8.3 billion in Russian assets right before President Vladimir Putin initiated the invasion.


Some commentators are asking if an ESG fund should ever have held investment in the country, that even before the invasion was an oppressive dictatorship engaged in systemic abuses of human rights, and was already under international sanctions for its annexation of Crimea. We think that is an important question to ask.


There is no doubt that many ESG funds have long been concerned with issues of democracy and human rights. In fact, the roots of ESG and responsible investing go back to the divestment movement from Apartheid-era South Africa. Divestment of companies involved, combined with sanctions, played a major role in dismantling Apartheid.


Today, many ESG funds evaluate underlying holdings based on the location of their headquarters or activities in non-democratic countries or those associated with human rights violations. For many funds, companies associated with Myanmar/Burma have been off limits. But, there is no doubt that Russia, and dare we say, China, are the ESG elephants in the room.


In our December blog we wrote (with unfortunate prescience) about this issue and pointed out that Honeytree does not invest in dictatorships. We stated that there is a strong moral imperative for investors to avoid investments in companies domiciled in authoritarian, dictatorial, or otherwise undemocratic countries. Doing so risks complicity in all kinds of bad practices, including abuses of human and labour rights.


We also pointed out that there is a strong investment risk imperative to avoid these securities. Companies that are based in undemocratic countries are inextricably bound primarily to the interests of the most influential stakeholder – the state. And the state’s interests will not always align (and perhaps not usually align) with a company’s interests and the objective of long-term sustainable growth.


The scale of the tragedy and the degree of human loss and suffering unfolding in Ukraine is difficult to fathom. While we would not want to suggest that this could have been predicted, the risks and necessary moral compromises when investing in dictatorships have always been clear.


We think it is important and necessary that ESG funds are under greater scrutiny. It is a scrutiny we welcome and, we hope, will leave the industry better in the long run.

lines of tanks parade through an urban center during a military parade