Continued focus on ESG

The Russian invasion of Ukraine has with extreme speed and political articulation raised strategic concerns with respect to Western military capacity and energy dependency structures. An immediate effect is that banks and asset managers are now communicating a reshuffle in their investment policies. The debate is now widening and questions are raised about where the ESG agenda is heading.

From FCG’s point of view, the following prerequisites  are vital in the continued discussion.

  1. Financing of a coal-fired power plants has regardless of geopolitical turning tides not miraculously become green. I How classification of counterparties and transactions is established with regards to environmental sustainability must hold true to have any credibility to begin with.
  2. Arms production outside of normal “defence”, including biological weapons, landmines etc can never be classified as meeting social responsibility requirements.

If these prerequisites hold true, the following two (albeit simplified) proposals could limit the damage that the very recent changes can potentially inflict on ESG-initiatives and investments to date.

Strategic funding of the defence industry and energy sector is expected from society and will be requested as part of the political process. It will now be up to the board to consider such financing on behalf of the bank, In the context of the  role of banks in the society, even though this will increase the amount of funding in the book that is negative in terms of environmental or social sustainability. The historical parallel of the issuance and trading of war bonds is clear, especially as capital raising is done for other strategic purposes than being the aggressor in an armed conflict. In return, the financial industry should be offered political stability and public acceptance, and not be subject to bank-bashing as long as the financing supports political long-term objectives.

Pre-mandated financing of this kind could be specially categorised and structured into two categories, for instance “Mid-term Strategic Energy Financing” and “Mid-term Strategic Defence Financing”) and mapped as environmental  and/or social respectively.  It should be an unambiguous process for the banks and asset management firms to categorise and carve out such investments (using the ‘whereof’-approach) in the disclosure reports and highlight their contribution to the overall ESG-metrics and position. An appropriately articulated standard for these categories would reference a pre-determined time-horizon during which these financing activities are gradually phased-out.

It is clear that the ESG-agenda, as we knew it prior to the 24th of February, has shifted. But if the financial industry can offer financing, consistency and transparency, the potential damage inflicted to the ESG-agenda can be limited.

Henrik Nilsson

Partner & Head of Advisory Sweden

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