Russia’s invasion of Ukraine has had ramifications throughout the global investment community. There are obvious repercussions: increasing volatility in equity and commodity markets as well as soaring inflation. But there are also more subtle effects: the war has forced investment professionals to navigate complex gray areas where their choices might be legal from a regulatory standpoint but questionable from an ethical standpoint.
The Russian-Ukrainian war is not the first conflict to affect the financial industry in this way, but it has changed the reality on the ground for practitioners. The investment community must recognize this and act accordingly. The threat of such conflicts and their consequences raise important questions that we must answer as a community.
Codes of professional standards like the CFA Institute Code of Ethics and Standards of Professional Conduct guide people facing real ethical dilemmas. Such dilemmas are like crossroads with the particular code of conduct serving as a roadmap that tells us which way to go. But a map is only useful insofar as it faithfully reflects reality. When reality changes, the map must be adjusted. Otherwise, those taking the wrong lane may encounter a more complex intersection further down the road.
Should portfolio managers own shares in companies that play a role in military aggression, even when it is perfectly legal to do so? Should an advisor cut ties with a client directly or indirectly involved in such conflicts? Where should the lines be drawn?
War-related issues are not unique to the investment profession, so answers to these questions must be guided by general moral standards and principles. But few phenomena do so much harm to capital markets or to society as a whole.
War not only poses risks to the profitability of the investment industry, but also to its reputation and credibility. Financial professionals or institutions that aid a government in waging a war to overthrow the rules-based global order can hardly bolster public confidence in financial markets or the investment profession.
We need to be aware of these risks. The Russian invasion of Ukraine demonstrated that war has dramatic ripple effects that extend far beyond the front line and are difficult, if not impossible, to model. What seemed solid as a rock can crumble in a matter of days. Before the war, Russian stocks were traded on foreign markets. Many had buy ratings from major investment houses. Shortly after the Russian attack, they were all worthless. Wealthy clients with established relationships have had their accounts blocked. Lucrative deals had to be scrapped and businesses liquidated. At one point, the market wondered whether the agent banks would transfer coupon payments from the Russian government to its creditors. A year ago, such concerns would have raised eyebrows. The conflict has changed the investment landscape on such a scale and at such speed that the rules need to be adjusted to remain relevant.
The question is: what should these new rules look like? Now is the time to start this discussion. Should there be explicit rules obliging investors and institutions to dissociate themselves from war-related activities in certain circumstances? What about an exclusion screening approach?
It is never easy to find a common denominator on complicated and conflicting ethical issues. Indeed, there are no perfect solutions to these dilemmas, but that does not mean that solutions are not possible. The investment industry could promote an environmental, social and governance (ESG) type approach when dealing with military conflicts. This could take the form of advice on best practices or the disclosure of war-related information to current and potential customers. These may include a list of holding companies that do business in the aggressor country or a divestment strategy detailing how the securities of these companies will be excluded in the future. There are no doubt other potential solutions that will emerge during these conversations.
The Russian-Ukrainian conflict has demonstrated that the consequences of major wars are impossible to predict and too great to ignore. This is why the investment community must come together to develop common standards to apply when such conflicts arise, but with the ultimate goal of preventing them from erupting in the first place.
Let’s start the discussion.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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