BUSINESS SANCTIONS ON RUSSIA: A NEW ERA OF CORPORATE ACTIVISM
By Richard Howitt, Skytop Contributor / April 11th, 2022
Richard’s background celebrates three decades as a strategic thinker who integrates innovation into organisational practice. A 22-year member of the European Parliament Rapporteur on Corporate Social Responsibility, he led the EU’s Non-Financial Reporting Directive. This initiative, recognized as the world’s foremost legislation on Corporate Transparency, brought him to new challenges.
This includes his work as CEO of the International Integrated Reporting Council, the Task Force on Climate-Related Financial Disclosure, Advisor to the UN Global Compact, Member of the European Commission SDG Platform, and the UN Guiding Principles for Business and Human Rights Reporting Framework Eminent Persons’ Group.
Richard is recognized as a Sage Top 100 Global Business Influencer, Thomson Reuters ‘Top 30’ Influencer in Risk, Compliance and Regtech. He is a Member of the B20 International Business Leaders’ Group and its Climate and Resource Efficiency Task Force. He currently serves as Strategic Advisor on Corporate Responsibility and Sustainability, and Senior Associate at the law firm Frank Bold LLC.
Divestment, Half Exits, or Digging In
No one knows how the conflict in Ukraine will end.
Clearly, the humanitarian consequences to its people must be at the forefront of all our minds, but this new ‘shock’ to businesses, investors and markets may well already have represented an historic change in the debates about corporate and investor responsibility.
The stampede amongst global businesses to exit Russia has been well reported, starting with big energy firms but now extending to around 500 companies across all sectors, (and being monitored by the Yale School of Management).
There have been ‘half exits’ with companies halting new investment but maintaining existing business and investors using what appear to be deliberately vague statements, such as ‘winding down’.
As always, there is the case against divestment, that it can harm ordinary citizens rather than the decision-makers and that presence in a country provides engagement which fosters understanding and respect for international norms.
But with the emotional wave of sympathy for Ukraine against the aggression, the 30-or-so companies which the Yale survey describes as ‘digging in’, are keeping a very low profile about doing so.
My own intuition is that – in contrast to previous pressures towards divestment – it is companies and investors who are driving decision-making, not governments in determining sanctions.
Choosing to Act
Already Bloomberg estimates that $45 billion of business has been withdrawn from Russia in a month.
Oil giants BP and Shell announced their divestment from Russia, well before the Biden administration introduced its ban on Russian oil.
A broad range of different companies have chosen to act, many not directly affected by sanctions regimes. Instead, investor pressure is often cited as pushing them to do so.
Many state-backed pension funds have shown leadership in making public decisions to divest, as has the Norwegian sovereign wealth fund. Other asset managers may be exerting their influence more in private than public, but some including Britain’s Abrdn have announced decisions to stop investment in Russia and Belarus. Two of the largest American banks, Goldman Sachs and JPMorgan Chase, followed suit.
How much of this is purely motivated by finance is less easy to determine, with the sharp shrinkage in the Russian economy, more costly and difficult transactions and hugely increased volatility in markets resulting from the uncertainty. Russia’s actions to limit cash withdrawals, require payments to be made in the ruble and ultimately to seize foreign assets, all put countervailing pressure on companies and investors considering withdrawal.
The fact that investors explain their actions as cutting ‘exposure’ to the Russian market itself exposes that economic as well as moral questions are at the heart of company decisions to pull out.
Speaking Out
Nevertheless, if companies are acting ahead of governments, perhaps the second big lesson from this crisis is that it has drawn into sharp relief that companies are political actors, with no alternative other than to speak out about the conflict.
A striking message came from Board Chair Helga Lund as BP announced its pull-out, saying “Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region.” The Chair and CEO of the world’s biggest credit card provider Visa, Al Kelly, said Russia’s invasion of Ukraine was “unprovoked” and “unacceptable”. Microsoft President Brad Smith said he was “horrified, angered and saddened” at the invasion and specifically called for respect for Ukraine’s sovereignty.
Following all the debates about corporate purpose, stakeholder capitalism and responsible business conduct, this crisis has been a test of whether business can live up to the expectations which it has created.
It is a test which at least some leaders have passed.
This is not business leaders simply echoing public sentiment or making personal expressions of sympathy, but of companies recognising that their own values, beliefs and purpose are incompatible with continuing business as usual with Russia.
Incidentally, rooting such communications in the company’s role rather than appearing simply to be making political statements, will help insure companies when they want to return to the Russian market in future and in dealings with other autocratic countries where human rights are violated.
Global accountancy giant KPMG made this explicit in its own statement to pull-out, saying: “We are a purpose-led and values-driven organization that believes in doing the right thing.”
Going Further
Many companies have gone further, contributing to humanitarian assistance to victims in Ukraine and to refugees fleeing the country. Intriguingly, a small number of companies can be said to have ‘joined the fight’, assisting with logistics and actual distribution of foreign supplied goods to both civilians and military personnel. Some technology firms have worked to maintain communications within the country and to thwart Russian attempts at cyber attacks.
The shocking television pictures of destruction should spur companies already to plan for the massive need for reconstruction when the conflict ends.
Within Russia itself, there remain brave (and perhaps forward-thinking) business leaders who have spoken out against the war. Banker Oleg Tinkov described it as “unthinkable and unacceptable”, whilst mining and steel magnate Alexei Mordashov called for the “bloodshed to stop”.
Reports that much-derided soccer owner and energy oligarch Roman Abramovich had actually been an advocate in peace talks between Russia and Ukraine, demonstrates that corporate activism has the potential to play an entirely different role in comparison to the past.
Of course, there will be sceptics who say that such actions are simply business leaders salving their consciences, seeking to protect their own reputations – and their own financial bottom line.
Still too many of the actions have been taken anonymously and which are therefore unaccountable to the wider world.
However, the scale and public nature of corporate activism in response to the Ukraine crisis is unprecedented. It appears to be a watershed moment for corporations choosing ‘self-sanctions’, and being willing to undertake advocacy, direct assistance and even diplomacy in relation to conflict in the world.
Future Crises
If the world is to return to a new Cold War and the ‘proxy wars’ which characterised those times, business may need to prepare for increasing conflict in the years ahead.
Indeed the questions companies who have been willing to demonstrate leadership should be asking themselves in this crisis are not just what more can be done now, but also what should be done now in relation to future crises?
Does the company have the right geopolitical analysis skills to predict future conflicts and are these genuinely incorporated in its risk management? Is it using its local
management across the world to engage governments on these issues and to bridge cultural divides. Is it not simply predicting future crises but acting to prevent them?
Note that China has recently passed a law to penalise companies for complying with foreign sanctions against Chinese entities.
An element to these questions is not how far the company should pull out of Russia, but of how and when it should be prepared to return?
If corporate withdrawals are intended to influence Russia to end its invasion, the prospect of investment returning is an essential part of incentivising the peace.
Detailed work has been undertaken (not always successfully) to address this question in recent years in relation to Burma/Myanmar, Iran and Sudan. This should take place now for Russia.
Impact for ESG
In the last part of this article, let me address sustainability or ESG (environmental, social, governance) advocates in business, of which I am one, on the further specific lessons which we need to learn in this conflict.
It is reported by Bloomberg that some $8.3bn of dedicated ESG funds were invested in Russia at the time the conflict began. These new potentially stranded assets represent what can be questioned as a lack of prescience from fund managers. However, it also suggests new thinking may be needed about how the potential for conflict (and arguably for conflict prevention) may become a new central tenet of sustainable investment itself.
Similarly, proponents of business and human rights have wrestled for a long time on how operations in the Russian market are compatible with its record of attacks against human rights defenders, restrictions on freedom of speech and widespread detention of opponents.
The invasion of Ukraine has now seen the very right to life bloodily ignored.
There are pharmaceutical companies and some others who have argued that the human rights impact of stopping supply to vulnerable people in Russia must also be taken into account. A generation ago, the ‘Sullivan Principles’ helped companies decide which investment should be retained in apartheid South Africa and which should not.
However, there is no doubt that companies must urgently use the human rights perspective to reappraise how their operations in Russia and other potentially aggressor countries might indirectly finance and support conflict?
Advancing the Case
Yet, in many ways the challenges thrown up by this crisis highlight and may advance the case for sustainable business.
The immediate impact of shortages of key energy and agricultural products, transportation delays and price hikes across whole economies, underline the complex supply chains which mark global business in the 21st century.
Once again resilience of the business and security of supply are critically affected by what used to be called externalities, of the prospects of external shocks which significantly disrupt the business itself.
This conflict is rooted in geopolitical rivalries, but many are fuelled by the battle to control resources and in social determinants which push or sometimes oppose governments towards extreme actions.
Russia’s aspiration for a land bridge to the Black Sea and the well-worn use of a ‘foreign enemy’ to quell domestic opposition are elements of this conflict too.
Managing these – what are sometimes called – risk factors for companies emanating from the social and environmental context in which business operates, is the essential stuff of sustainable business.
A world of increasing conflict simply adds a new dimension to these challenges. It is a further reminder that business must think beyond the short-term.
Climate
Meanwhile, could the conflict actually accelerate the shift towards a Net Zero world?
Pressure for government subsidies on the escalating energy bills of today’s fossil fuels and the new ‘oil rush’ to find alternatives to Russian supplies may suggest the opposite. The call from the American Petroleum Institute for an “unleashing” of domestic oil production, was particularly eye-catching in this respect.
However, it is difficult to believe that simple economics will not kick in, with a persisting $150 per barrel oil price representing a dramatic shift in the cost advantage of renewable over non-renewable energy sources.
There is not a finite limit on the rate of increase in the production of renewables, but a cost curve for the investment needed to do so.
That cost curve has suddenly shifted.
The climate imperative for energy transition may well have received its biggest stimulus.
War
It is difficult to end without recognising that human cost is the biggest impact in any conflict.
Politicians are wrong to say the Russian invasion is a ‘special military operation’ and business must not hide behind a description that this is a geopolitical situation.
This is a war.
The costs and risks to business are ultimately nothing compared to the suffering of the people in Ukraine.
Our ability to affect what is happening may be limited.
But it is there.
The business leaders who have chosen to speak out and to act in this conflict have shown that it should be inescapable for all in business to respond to the conflict in Ukraine.
“In war we find out who we are,” according to the American writer, Kristin Hannah.
It is time for business to find that out for itself.