How the Russian Invasion of Ukraine Impacts ESG Investors and What to Look for Ahead

Jun 21, 2022 | Newsletters

How the Russian Invasion of Ukraine Impacts ESG Investors and What to Look for Ahead

Since the beginning of Russia’s invasion of Ukraine, the world has understandably focused on the tragedy inflicted on the people of Ukraine. When it comes to investing, the invasion has profound implications for ESG considerations. Initial attention focused on the social ramifications for investors and business, but it may be the environmental angle where the most long-term impacts will be felt.

From the social perspective, Russia is now uninvestable. Earlier iterations of Russian aggression were easier to sweep under the rug. In 2008, the invasion of Georgia quickly fell from the headlines given the other events at the time. In 2014, the War in Donbas and annexation of Crimea seemed contained and were soon viewed as a frozen conflict. However, the scale of the invasion of Ukraine and the strength of the response by Western countries in terms of both military aid and sanctions, has made further investment by most Western firms impractical. Index managers have also responded by dropping most Russian firms from their lists. The result is that for investors in liquid public markets Russian exposure is limited. To be fair, it was limited to begin with outside of emerging markets strategies.

The impact on the environmental side of the equation is more complicated, and likely more meaningful long-term. In the short-term the impacts of Russia’s invasion of Ukraine on ESG investing are muddled, mainly because of supply chains. The long-term ramifications are clear.

Fossil Fuels

The sector to see the most immediate impact from Russia’s invasion is energy. Sanctions on Russia threaten to remove somewhere between 3-5% of total oil supply from global markets. At a minimum, trade flows for oil, natural gas, and coal have been severely disrupted, as European and American consumers reject Russian fuels, and the discounted commodities need to be shipped elsewhere at steep discounts. In the short term, this is a boom for producers. Higher prices, particularly as economies around the world reopen, will lead to record earnings and cash flows. It would be tempting to add money here, but as we’ve seen in the past, high prices are their own best cure.

This is truer now than ever. High prices were addressed in the past by either lower consumption or higher production. Now for the first time we have scalable and cost-effective substitutes. If you don’t want to pay for gas, but have to commute, buy an EV. If you are trying to move your country off Russian gas, but are unwilling to build nuclear reactors, accelerate deployment of wind and solar. Natural gas plants were competitive with wind and solar from a cost standpoint when Henry Hub prices averaged $3. Now they are nearly three times that level. Power purchasers around the world are no doubt realizing that renewables are attractive for their low prices, but also because the wind and sun are free and not subject to the whims of an autocrat. With grid-level battery storage increasingly available, they also no longer need to be considered “variable”.

The current high prices are a pyrrhic victory for oil and natural gas producers. For proof of this we need look only at coal. Thermal coal prices are at their highest levels in years, but that is cold comfort to the plants and mines that have closed over the last 15 years and will do no good for equity investors forced to live through multiple bankruptcies. Today’s high prices make fossil fuel power supplies even less competitive than they already were.


The immediate corollary to the run up in energy markets is the continued growth of electric vehicles. Rising prices at the pump, while not record highs adjusted for inflation, are enough to make more people consider switching to EVs. Internet searches for how to buy an EV were already trending up in many markets before the Russian invasion and have seen another spike since. Even before concerns about global warming, the rationale for buying an EV has never been clearer, and this should drive greater market adoption over both the short term, as well as the long term given that few EV buyers go back to internal combustion.

The greatest challenge to faster EV adoption in the current environment is the supply chain. Prices for everything from nickel to lithium to computer chips have skyrocketed, and a part as mundane as a wire harness can grind production to a halt. Viewed in isolation, this could be concerning for EV growth, but these same forces also apply to traditional vehicles, and the inflationary pressures and supply challenges apply across the board. Certain inputs such as lithium obviously matter much more for EVs but not to the point of making them less competitive. Data shows market share in Europe and China for EVs approaching 25% and nearly 30% respectively.


Looking beyond the energy cost equation there are other factors related to Russia’s war that move the needle towards stronger renewable adoption. The biggest is simply security. Much of Europe has finally woken to the reality that their energy supplies are overly dependent on Russia. At this point, the goal seems to be to cut dependence as much as possible. Initially there was consensus around banning Russian coal. Then a plan emerged around reducing imports of Russian gas. Now, there is a plan to restrict oil imports. In other words, when circumstances forced Europe to focus on what they could afford, it turned out they were able to do much more than expected. Europe can contemplate such actions primarily because the prices of solar, wind, and batteries have dropped so much in the last ten years. The conversation just would not have happened after Russia’s first invasion of Ukraine; it could not have. We do not know what path Europe’s energy decoupling will take, but we do know that it will be even faster than planned a few months ago, and that renewable deployment follows a learning curve. Additional capacity will lead to even lower prices, accelerating existing trends.

Compelling ESG investments, whether it be in energy, EVs or elsewhere, while buffeted by short term headwinds, have only seen their long-term investment cases buttressed by Russia’s invasion of Ukraine. Interest in EVs is spiking, while the case for clean energy is now a three-legged stool of cost, climate change, and global security. While the short-term impacts are varied, the future remains clear for the environmental side of ESG investments.

About the Author: John Petrofsky, CFA, CAIA
John is responsible for guiding his clients through the process of determining their investment goals and portfolio construction. John is also an active member of FBB’s investment committee, providing insights on macro trends and asset allocation as well as assisting with security selection broadly and with a particular focus on clean-tech, renewable energy, and the electric utility sector. John is a CFA® charterholder and a Chartered Alternative Investment Analyst. Prior to graduate school, John worked as a Senior Consulting Associate at Cambridge Associates assisting clients with asset allocation, investment policy statements, manager monitoring and selection, and portfolio management. John was also an Equity Portfolio Manager for a Large Cap Value strategy. John received his undergraduate education from Stanford University and his MBA from the University of Virginia’s Darden Graduate School of Business. While at Darden, John served as the Senior Portfolio Manager for the Monticello Fund of Darden Capital Management, a student-run investment club that actively manages a portion of the University’s endowment. John and his wife Laura live in Washington, DC. In his spare time, John enjoys hiking, running, and has an active interest in conservation, particularly in his native New Hampshire.

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