ESG Goes to War

Russia’s invasion of Ukraine has given rise to an exodus of Western-based multinational firms from the Russian market. Emblematic of this was BP (formerly British Petroleum), the British energy firm, deciding in the days after Vladimir Putin’s forces entered Ukraine to sell its 20 percent stake in Rosneft, Russia’s state-controlled energy company. Since then, a number of other large companies have elected to suspend or exit their operations in Russia, and the Wall Street Journal and other publications have tracked the growing number of Western businesses pulling out from the Russian market, a list spanning myriad industries and headquarters countries that includes Apple, Boeing, Ford, Volkswagen, American Express, H&M, FedEx, and Google.

It may be that these companies are leaving theRussian market entirely for morally commendable reasons in the face of Putin’s naked aggression and violation of Ukraine’s sovereignty. But it raises another question: why now? 

Neither the Russian Federation’s previous military incursions into Georgia, Crimea and the Donbass region of eastern Ukraine, nor its record of murder, torture, and poisoning of political dissidents gave these companies pause about doing business in Russia, and their continuing to do so until recently is decidedly at odds with the environmental, social, and governance (ESG) principles professed by most large multinational corporations. One could argue that while all of these actions transgressed international norms, the Ukraine invasion is of a different order of evil. But that argument minimizes Putin’s prior actions: an assertion that is more than a little distasteful. 

So what changed?

Of course, what this reveals is that in practice these companies are not responding to events in light of their avowed ESG principles, but rather through a more practical fiduciary calculus with shareholder value maximization at its core. Other than on an episodic and limited basis, the United States and other major Western nations have not previously sanctioned the Russian Federation or Russian enterprises for the bad acts of its government, thus giving the green light to Western commercial engagement. While earlier Russian misdeeds drew the ire of Western governments and media, these objections never rose to the level of significant, widespread sanctions or commercial prohibitions. 

Companies deciding to withdraw from the Russian market are not doing so to show their commitment to some mythical ESG threshold, but are instead motivated by two very basic factors. The first is the very real public relations impact of doing business with and in a pariah state—the risk of blowback from customers, suppliers, employees, regulators, and other counterparties by continuing to operate in Russia must be weighed against the commercial advantage of remaining in the country. Second, maintaining Russian operations risks running afoul of existing or future governmental sanctions, which place enterprises at significant risk of financial penalties or other nasty consequences. Each of these reasons inform clear-eyed decisions consistent with the fiduciary duty of a company’s board and management to its shareholders.

In contrast, stakeholder capitalism—an animating principle underpinning the ESG movement—suggests that non-state actors (privately owned corporations) assume responsibilities more properly placed within the ambit of governmental public policy. Any ESG regime worth its ethical salt should have prompted companies to act in light of Russia’s earlier actions in eastern Ukraine, not to mention those of China in Xinjiang province, among others; their failure to do so reveals their actual motivations.

The reality is that the invocation of ESG by market participants is situational and illustrates an age-old agency problem in corporate governance. ESG advocacy better suits the interests and objectives of such agents (management teams, their boards of directors, and institutional investors) than the shareholder beneficiaries to whom they collectively owe fiduciary obligations. The current fashion for mandating ESG requirements on private enterprise advocated by the World Economic Forum, asset management firms, and the commentariat represents the boutique objectives of a managerial-class echo chamber, seeking to will certain policies into existence (including “decarbonization” and the inevitability of an energy transition away from fossil fuels) over the heads of accountable, democratically elected representatives and the citizens to whom they are beholden. Moreover, these fiduciaries fail to honor the financial interests of the shareholders over whose capital they exercise stewardship.

The flaws and inconsistencies of the ESG movement have been pointed out on these pages and elsewhere, yet the ESG ecosystem continues its inexorable expansion for the benefit of countless high-profile government and private-sector enthusiasts. What the Russian invasion of Ukraine exposes is what many critics have long argued: Support for ESG is in many cases empty sloganeering, and is sustained more by the economic rents inured to its cheerleaders than by its own merits as a serious rival to the long-established fiduciary objective of maximizing shareholder value.

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About Richard J. Shinder

Richard J. Shinder is the founder and managing partner of Theatine Partners, a financial consultancy.

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