Russia’s invasion of Ukraine

Russia’s invasion of Ukraine

The humanitarian crisis caused by Russia’s invasion of Ukraine is both horrifying and deeply concerning. Events like this throw our role into sharp relief, first and foremost, as citizens, not just investors.

In recent weeks a number of clients have asked us about WHEB’s exposure to the war and its economic fallout, so we wanted to clarify our position by publishing an update for all our investors.

No direct exposure to companies listed in Russia, Belarus or Ukraine

The WHEB strategy does not have any direct exposure to companies listed in Russia, Belarus or Ukraine, or to these currencies. We do, however, have companies that sell into those markets and some that may have operations there too. But none of the stocks in the portfolio have anything approaching a material level of revenue exposure. (We define ‘material’ as greater than 5%.)

We own a few stocks that have low single digit revenues from Russia. Because the percentages are small it usually isn’t broken out in company reporting. Rather, it would be reported under a regional category or a catch-all ‘Rest of World’.  Based on FactSet data at the holding level, we would estimate that aggregate portfolio exposure is less than 1% of total revenues.

Supply-chain disruption more important than direct revenues

It is possible that the impact will be felt more from supply chain disruption than at the revenue level. We have identified several areas where the conflict is likely to have an impact on global supply chains. The first is in agriculture and food supply chains. Belarus and Russia account for just under 40% of global potash production. They also make up about 30% of global trade in wheat, 32% in barley and 17% in corn. Within the portfolio this is most likely to affect HelloFresh because of the knock-on effect on food prices. The second area is in the automotive supply chain as a result of Russia and Ukraine’s role in production of metals, such as aluminium and copper. It’s also affecting operations of automotive OEMs in Russia, including Toyota, Ford, Hyundai and VW. This is weighing on auto related stocks such as Aptiv. Russia is also an important supplier of rare earth metals and also of neon gas, a noble gas used in the semiconductor manufacturing process. This is likely to put further pressure on an already stretched semiconductor supply chain. The strategy has exposure here through companies like Infineon and Power Integrations.

Knock-on effects from oil and natural gas prices

The effect on oil and natural gas prices will have much broader implications, for companies and the economy as a whole. The price of Brent crude oil hit a 14 year high of $139 per barrel on 7 March. With the prospect of sanctions on Russian oil, the outlook is for further price increases. Rising energy and food prices contribute to further inflation for the consumer. Prior to the invasion of Ukraine, inflation was already increasing as a consequence of the post-Covid economic recovery. The outlook for growth now is less clear, and sentiment is likely to be more negative. This creates a dilemma for the US Federal Reserve: should it use monetary policy to combat inflation or to try to respond to the dampening effect of the conflict on global growth? Currently, the expectation is that interest rates will still go up despite the economic uncertainty, but potentially to a lesser extent than previously anticipated.

WHEB’s strategy is focused on developed markets

Some have asked if we would explicitly exclude investment directly in Russia or Belarus. Our developed market focus means that we have historically been highly unlikely to have an investment listed in either of these markets (or indeed in any other Eastern European countries). Our process generally doesn’t rely on exclusions, either at an industry or country level. However, we do set out the ethical outcomes that we think are a natural consequence of our focus on positive impact and our integration of ESG. Taken together, these provide a further buttress to our process. As a consequence, we can say companies with significant exposure to Russia or Belarus would not be qualified for investment in our strategy.

Armaments and positive social impact

Since the conflict started, some within the industry have questioned whether, in the current geopolitical context, armaments could be considered an ESG investment.

While we do not use explicit negative criteria for the strategy as described above, any company with significant involvement in controversial activities, including armaments (as well as tobacco, pornography, gambling, etc.) will not be held because these are not industries that fit the strategy’s sustainable investment themes. We consider these products to have a significant negative impact and the investment team only invest in companies where they are clear on the overall positive impact of the business. Companies that have significant activities in these areas are ineligible for investment.

The invasion of Ukraine has shocked the world. It has already catalysed increased defence spending. (For example, Germany has announced a €100bn package and a commitment to spend 2% of GDP on defence.) However, we don’t think it should fundamentally change the way we approach the defence sector. Within social sustainability, human rights are the main component that would be relevant to questions of defence. Protecting and promoting human rights would be seen as a positive contribution to social sustainability.

However, drawing a straight line between weapons, defence and human rights protection is an over-simplification, in our view. Looking at past conflicts it would be very difficult to conclude that governments always execute defence in a way that is consistent with social sustainability, even where that might be the intention.

According to the UN Global Compact, social sustainability is about identifying and managing business impacts, both positive and negative, on people. Taking the view that weapons contribute to positive impacts that outweigh negative is a challenging conclusion to reach in our view. Not only does it require analysis of the customer base, it also requires normative judgements of who are the good and bad actors. While most have rightly condemned Russia’s actions, there is still significant debate about the level of military involvement Europe or the US should have in this conflict. The role of Western governments in other conflicts has been equally controversial. Looking at it purely from the perspective of risk of negative harm takes out normative judgments, and we think leads to a conclusion that armaments businesses shouldn’t be considered to generate positive impact because there is an inherently high risk of negative human harm.


Reflections, Soul Searching and Awkward Conversations

The last few years have caused so much pause for thought it’s often overwhelming. COVID, #metoo, the climate crisis, Black Lives Matter protests, and now war in Ukraine have all laid bare deep and continuing societal inequalities. Many of those that exist today are already well known. Some are less visible. Understanding the causes and finding ways to address them presents a significant challenge. Acknowledging the role we ourselves may play, and our own prejudices, is particularly difficult and confronting. At WHEB, we have been asking ourselves how we can address these issues as individuals, as a company, as an industry and as a society. And it’s causing some real soul searching.

Diversity and inclusion is a critical topic and the financial services industry is a laggard in addressing the issue.  As a B Corporation and impact manager we are trying to be part of the solution, but we know we are still a “work in progress”. We think that means considering our employees as individuals, the investments we make and our role in the industry.

Our employees

In the past two years WHEB has become a company where nearly 70% of the team are women. This shift has brought with it diversity of thought, perspective, and some awkward conversations. One of these conversations arose during our book club with our latest read, “The Authority Gap – Why women are still taken less seriously than men, and what we can do about it.”

It wasn’t an easy read. For the women, it was over 200 pages of examples reminding us of the challenges we’ve all faced in our daily lives. For the men, it was eye-opening to hear story after story of their co-workers experiencing this authority gap and general second-class treatment their entire careers.

In some cases, the reaction was surprise that this exists. That surprise shows that one of the things we need to overcome is learning to notice things which don’t affect us the way they affect a minority or marginalised group. That can mean ethnicity, race, gender, sexuality, and disability to name just a few.

Our investments

One conversation that followed on from that discussion came when we were asked by an investor about companies in the portfolio that might be furthering gender diversity from an impact perspective. We do own Cooper Companies, which generates approximately 25% of revenue from women’s health. While there is clear positive impact behind the products and services Cooper provides, it did prompt a debate about the role of contraception and the potential side effects. For example, why does the burden of contraception fall so heavily on women? And where else might there be inequalities in the health system? More broadly, access to finance for funding female health research is an additional challenge.

When it comes to impact in the listed equities space, our focus is on how a company’s products and services contribute to solutions. This can be challenging when it comes to diversity because in the listed space there aren’t many opportunities which directly address the issue, outside of women’s health.

In general, our industry looks at Gender Equality investing through an ESG lens. In other words, investors tend to explore how a company operates rather than what it sells. We would not consider this to be ‘Impact’, however it is an important part of what we do. For example, we consistently vote against company proxies where the Board comprises less than one third female representation. We also engage with our investee companies to report detailed diversity data across all levels of its organisation. When this data is disappointing, we ask our companies to disclose what they are doing to improve female and minority representation and ensure equal opportunities.

The industry

The Cooper Companies discussion shows that diverse representation isn’t the only challenge, we also need to think about inequalities when it comes to accessing finance. We have seen various movements and initiatives trying to drive momentum in both. These are starting an important dialogue and enabling the industry to reflect and seek solutions.

We are also seeing increasing scrutiny from clients who want to know that their financial services providers are addressing the issue. We need to ensure these questionnaires don’t turn into box ticking exercises. We are committed to shifting the narrative away from a compliance mindset towards a meaningful dialogue that drives real cultural change and accountability.

As a start we have reviewed and updated our Diversity & Inclusion Policy. But we also need a better framework in terms of how we can answer these important questions and how as a company we can move forward. As a founding member of City Hive, a think tank and advocacy group, we are planning to also become a founding signatory of their ACT standard of corporate culture. This framework will aim to help us develop a strategic approach to developing an inclusive, diverse, and equitable work environment.

As a small business we are in a good position to build that culture from an early stage. It’s much harder to make that shift in a large, established organisation. Scale does have benefits though, for example significant resources that can go into widening the candidate net. But resource isn’t an excuse not to do it. At WHEB we are committed to diversity in our growth. We are proud of our efforts so far, but we recognise there is much more we can do.

Having the difficult conversations is a great place to start, and we will continue to back that up with action. That includes internally, with our investments, and with the industry as a whole.

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Pengana Capital Group