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Uninvestability of Russian stocks and bonds affects ESG and conventional fund investors
The Russian invasion of Ukraine on February 24 produced an unprecedented, coordinated response by the U.S., the European Union, the U.K., Canada, Switzerland, Japan, Australia and Taiwan. Sanctions were followed up on March 8 with a ban on the import of Russian Oil, liquified natural gas and coal to the United State as well as…
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The Bottom Line: Both conventional and ESG fund investors may be exposed to Russian securities that have declined in value primarily in emerging market funds.
The Russian invasion of Ukraine led to suspensions in trading and likely modest portfolio losses in some active and passively managed funds primarily focused on emerging markets
The Russian invasion of Ukraine on February 24 produced an unprecedented, coordinated response by the U.S., the European Union, the U.K., Canada, Switzerland, Japan, Australia and Taiwan. Sanctions were followed up on March 8 with a ban on the import of Russian Oil, liquified natural gas and coal to the United State as well as new investment into Russia’s energy sector. The UK and EU took other oil and gas related importation measures. The Russian central bank responded, in part, with a hike to its key interest rate from 9.5% to 20% and to the imposition of capital controls. Russia’s central bank has also temporarily banned sales of local securities by foreigners and banned payments of dividends and interest on bonds to foreigners. Trading was suspended on the Moscow Exchange, prices for Russian stocks and bonds plummeted and liquidity evaporated, leading buyers, according to reports, to view Russian assets as “uninvestable.” As a result, both conventional and ESG investors in active and passively managed mutual funds and ETFs, especially emerging market equity and bond funds, with exposure to Russian stocks and bonds may have experienced some decline in the value of their portfolios. Recent market volatility combined with limited strategy-based exposures to Russia along with other market influences likely obscured these declines in many portfolios. Still, these developments reinforce the fundamental principles that investors should adopt in their investing approach, namely portfolio diversification, liquidity and patience.
Implications for conventional and ESG investors in mutual funds and ETFs
To the extent held, exposure to Russian securities in equity and fixed income portfolios fluctuate by portfolio strategy, including active and passively managed funds. To illustrate, the iShares ESG Aware MSCI Emerging Markets ETF (ESGE) that seeks to replicate the performance of the equity-oriented MSCI Emerging Markets Extended ESG Focus Index held securities of firms like LUKOIL PJSC, Sherbank of Russia, Novatek PJSC or Polymetal International PLC, to mention just a few. In total, these along with other Russian equity holdings accounted for about 3% to 4% of the index and, in turn, portfolio assets based on the latest annual report as of August 31, 2021 and heading into February 2022. These securities are now valued at 0 dollars or close to 0 dollars. On the bond side, ESG funds tracking emerging market indices like the Xtrackers JPMorgan ESG EM Sovereign ETF (ESEB) that tracks the JPMorgan ESG EMBI Global Diversified Total Return USD Index also maintained similar levels of exposure to Russian foreign bonds, even as Russian debt accounted for lower average levels across JPMorgan’s emerging market indices. According to The Wall Street Journal on March 15, Russian government bonds fell below 10 cents on the dollar the previous week, after trading around 100 cents on the dollar prior to the Ukraine invasion. The combination of strategy, low exposures, the elevation of market volatility generally and other market influences since the start of the year means that the impact on portfolios was likely muted in many, but not all, cases. Some actively managed and thematic funds may have been caught in less favorable positions. The actively managed Ashmore Emerging Market Equity ESG Fund, for example, ended its October 31, 2021 fiscal year with a 10.08% exposure to Russian stocks. The fund posted declines of 10.2% and 5.0% in February and January, respectively. The VanEck Green Metals ETF (GMET) tracking the MVIS Global Clean-Tech Index maintained a 5.3% exposure to Russia’s MMC Norilsk Nickel PJSC ADR entering 2022 and the fund dropped 3.6% in January, but quickly bounced back, gaining almost 13% in February as strategic metals prices experienced a boost.
Impact on index managed funds: Leading index providers remove Russian securities from their indices
Leading equity index providers S&P Dow Jones, MSCI and FTSE Russell as well as bond index providers Bloomberg and JP Morgan moved quickly to remove Russian stocks and bonds from all relevant benchmarks, including emerging market stock and bond indices, both conventional and ESG indices. Following consultations with several market participants, MSCI announced that it would remove Russian securities from its indices after markets close on Wednesday, March 9, at a price “that is effectively zero.” Russia’s debt will also be excluded from the JPMorgan Emerging Market Bond Index, the Government Bond Index-Emerging Markets, the Corporate Emerging Markets Bond Index and all the bank’s other benchmarks, effective March 31. At the same time, indices were rebalanced to reflect the removal of Russian securities.
Index tracking mutual funds and ETFs have had to take similar actions to keep their portfolios aligned with their tracking benchmarks or suffer widening tracking errors. Currently restricted from trading in Russian securities, these may continue to be held in portfolios at 0 or close to 0 values. Still, portfolios have had to be rebalanced and, in the process, they likely incurred additional trading costs. At this juncture, it’s not known when, or if, sanctions may be lifted or the funds’ ability to trade in Russian securities will resume (it should be noted that trading in local currency bonds reopened on Monday and it has been reported that the Russian stock market will partially reopen on Thursday of this week).
Impact on actively managed portfolios: More flexibility and in some cases higher levels of exposure to Russian securities
Unlike index funds, actively managed portfolios are not constrained in the same way as they are not index bound. While their performance for relative evaluation purposes may be compared to indices that have removed Russian securities, they have the flexibility to invest higher or lower proportions of their portfolios in Russian securities. They also have the flexibility to liquidate securities ahead of market closures or to hold such securities while evaluating the long-term impact on valuations as well as the ability to trade those securities. Indeed, some actively managed funds maintained significantly higher as well as lower Russian exposures relative to benchmarks. Examples include the Ashmore Emerging Market Equity ESG Fund and Ashmore Emerging Markets Corporate Income ESG Fund with investments in Russia of 10.1% and 6.2%, respectively as the funds’ October 31, 2021 year-end while the BlackRock Sustainable Emerging Markets Bond Fund held a 2.0% position. That said, any current holdings are likewise carried at 0 or near 0-dollar values.
Refer to Table 1 and Table 2 for a sample listing of sustainable active and passively managed equity and bond mutual funds and ETFs likely holding Russian securities. The sample listings have been compiled based on a review of index tracking funds along with their tracking indices as well as actively managed funds based on their latest reporting periods. In some cases, actively managed funds could have reduced or eliminated their Russian securities exposures prior to February 24, 2022.
Published March 23, 2022
Table 1: Sample listing of sustainable equity and bond ETFs with likely exposures to Russian securities
Fund Name
Fund Type
Tracking index or prospectus designated index
$ AUM
BNY Mellon Sustainable Glbl Em Mkts ETF (BKES)
Actively Managed-Equity
MSCI Emerging Markets NR USD
8,827,728
iShares ESG Advanced MSCI EM ETF (EMXF)
Index Tracker-Equity
MSCI Emerging Markets Choice ESG Screened 5% Issuer Capped Index
28,978,796
iShares ESG Aware MSCI EM ETF (ESGE)
Index Tracker-
Equity
MSCI Emerging Markets Extended ESG Focus Index
6,513,073,329
iShares® ESG MSCI EM Leaders ETF (LDEM)
Index Tracker-Equity
MSCI EM Extended ESG Leaders 5% Issuer Capped Index
71,431,395
Nuveen ESG Emerging Markets Equity ETF (NUEM)
Index Tracker-Equity
TIAA ESG Emerging Markets Equity Index
147,737,382
SPDR Bloomberg SASB EM ESG Select ETF (REMG)
Index Tracker-Equity
Bloomberg SASB Emerging Markets Large & Mid Cap ESG Ex-Controversies Select Index
28,140,652
SPDR® MSCI Emerging Mkts Fossil Ful Free RsrvETF (EEMX)
Index Tracker-Equity
MSCI Emerging Markets ex Fossil Fuels Index
133,235,452
WisdomTree Emerging Markets ESG ETF (RESE)
Actively Managed-Equity
MSCI Emerging Markets Extended ESG Focus Index
27,048,054
WisdomTree Emerging Markets ex-State-Owned Entrprs ETF (XSOE)
Actively Managed-Equity
WisdomTree Emerging Markets ex-State Owned Enterprises
3,438,850,548
Xtrackers EM Carbon Reduction &Climate Improvers ETF (EMCR)
Index Tracker-Equity
Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR
731,133,538
Xtrackers MSCI EMs ESG Leaders Eq ETF (EMSG)
Index Tracker-Equity
MSCI EAFE ESG Leaders Index
23,335,423
Xtrackers JPMorgan ESG EM Sovereign ETF (ESEB)
Index Tracker-Bonds
JPMorgan ESG EMBI Global Diversified Total Return USD Index
26,367,251
Notes of Explanation: In compiling the sample listing of funds, emphasis was placed on emerging market funds. For actively managed funds, the listed index reflects the fund’s prospectus designated index, where available. Sources: $AUM data sourced to Morningstar Direct. Otherwise, fund prospectus, annual and semi-annual reports, compiled by Sustainable Research and Analysis.
Table 2: Sample listing of sustainable equity and bond mutual funds with likely exposures to Russian securities
Fund Name
Fund Type
Tracking index or prospectus designated index
$ AUM
Aberdeen Emerging Mkts Sust Leaders Instl Svc (GIGSX), A (GIGAX), C (GIGCX), R (GIRRX), and Institutional (GIGIX)
Actively Managed-Equity
MSCI Emerging Markets Index (NR) USD
158,417,902
Allspring Emerging Markets Equity Inst
(EMGNX), R6 (EMGDX), C (EMGCX), Adm (EMGYX), A (EMGAX)
Actively Managed-Equity
MSCI Emerging Markets Index (NR) USD
5,199,617,255
Ashmore Emerging Markets Equity ESG Ins (ESIGX), A (ESAGX), C (ESCGX)
Actively Managed-Equity
MSCI Emerging Markets Index (NR) USD
12,167,893.00
BlackRock Sustainable Adg EM Eq Ins
(BLZIX), K (BLZKX) and A (BLZAX)
Actively Managed-Equity
MSCI Emerging Markets Index (NR) USD
10,876,097
Calvert Emerging Markets Equity I (CVMIX), C (CVMCX), A (CVMAX) and R6 (CVMRX)
Actively Managed-Equity
MSCI Emerging Markets Index (NR) USD
3,476,825,833
Artisan Sustainable Emerging Mkts Inst (APHEX) and Inv (ARTZK)
Actively Managed-Equity
MSCI Emerging Markets Index (NR) USD
80,963,512
Ashmore Emerging Markets Corporate Income ESG A (ECAEX), C (ECCEDX) and Ins (ECIEX)
Actively Managed-Bond
NA
80,227,827
BlackRock Sustainable Emerging Markets Bond Ins (BEHIX) and K (BEHKX)
Actively Managed-Bond
JPMorgan EMBI Global Diversified TR Bond Index
20,468,829
Notes of Explanation: In compiling the sample listing of funds, emphasis was placed on emerging market funds. For actively managed funds, the listed index reflects the fund’s prospectus designated index, where available. NA=Not available. Sources: $AUM data sourced to Morningstar Direct. Otherwise, fund prospectus, annual and semi-annual reports, compiled by Sustainable Research and Analysis.
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