Moves to expel Russia from ESG indices widening

4 min read
EMEA
Tessa Walsh

Artificial intelligence-driven ESG ratings platform Sevva.ai has downgraded the ESG ratings of Russian stocks listed on the Moscow Stock Exchange to zero as investors step up calls for Russia to be removed from traditional bond indices too.

Financial technology company All Street SEVVA owns Sevva.ai and has overridden the algorithms used to calculate sustainability ratings in response to Russia’s invasion of Ukraine in what is thought to be the first move of its kind from a ratings firm.

It says that directing new investment to Russian securities is not compatible with the UN’s Sustainable Development Goals and that investors should not be allocating capital to Russia in light of the current risk to European and world peace.

“We believe that every company based in Russia is in flagrant conflict with all United Nations goals, not just Sustainable Development Goals. We are downgrading all the Russian companies to zero because we want to send a signal ... that no-one should put any money there,” said Emanuela Vartolomei, founder and CEO of All Street.

All Street is calling on other ESG ratings firms and index providers to make similar moves. Banks, including JP Morgan, are also coming under increasing pressure from investors to exclude Russia from all indices as sanctions mount.

“We believe that every other rating agency should do the same because at that point there will be no debate in the investment professional space that we should consider or think about Russian companies until this blockade is resolved,” Vartolomei said.

MSCI ESG Research has downgraded Russia to B from BBB and Belarus to B from BB with immediate effect, both with a negative outlook. It has also started its Sovereign Watch event assessment, which allows it to reflect the immediate impact of major events in extraordinary circumstances, and is monitoring MSCI ESG government ratings for Russia, Belarus and Ukraine.

"We are monitoring the situation closely and believe there is still significant downside risk to Russia’s ESG Government Rating. It is possible that further developments could yet drive an additional downgrade," MSCI said.

JP Morgan under pressure

JP Morgan has put Russia under review for removal from its JESG suite of indices from March 31, but is not currently proposing to remove the existing debt of Russian entities from its traditional indices.

New debt from sanctioned Russian entities will not be eligible for inclusion in JPM’s indices from March 1, but there is no change to the existing Russia bond compositions in three indices as of February 28.

These are the JP Morgan Emerging Market Bond Index, the JP Morgan Government Bond Index-Emerging Markets and the CEMBI Broad Diversified Core Index. The exact Russian weightings are 6.23% in the local currency index GBI-EM Global Diversified and 2.98% for the hard currency EMBI Global Diversified.

Investors such as Tim Ash at BlueBay Asset Management are calling for index providers to remove Russia and Russian entities from all bond indices if they are serious about sustainability.

Ash says that JP Morgan’s decision not to do so “was not good enough” and was scathing about the US bank “only dropping Russia from ESG indices but ‘thinking’ about the rest". He said: “War crimes are being committed now. If it really cares about ESG it would act now.”

All Street’s Vartolomei agrees. “Why only ESG indices? All the indices, cut Russia out. Every company needs to do what it can to weaken Putin’s regime, and today’s decision by All Street reflects this.”

Sevva uses AI to read thousands of documents almost instantly and calculate real-time ESG sustainability ratings for 70,000 public and private companies based on UN SDGs.

Its service is one of the next generation of ESG tools designed to help investors to assess the ESG performance of portfolios, meet their own disclosure requirements and create analysis on the impact of climate change.

As well as sending a powerful signal to the capital markets about capital allocation to Russia, All Street says it hopes that its move will deter any new investors from trying to profit from the crisis.