ESG Gives Russia the Cold Shoulder, Too
MSCI jumped on the Russia dogpile this week, reducing the country's ESG government rating to the lowest possible level.
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The environmental, social and governance (ESG) rating firm MSCI downgraded Russia’s ESG Government rating this week, from B to the lowest rating possible, CCC.
Many ESG fund managers rely on MSCI ratings for portfolio construction and for ETF indexes. Thus, many Russian companies could end up being cycled out of funds that rely on maintaining a minimum ESG ratings bar for inclusion.
The downgrade acts as yet another hit to Russian investments, many of which have been flattened since the country’s invasion of Ukraine. It's not the first one, either; MSCI ESG Research originally downgraded Russia at the end of February.

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“Since the downgrade to B on Feb. 28, we have observed further heightening of Russia’s ‘Economic Environment’ and ‘Financial Governance’ risks based on the widening domestic impact of international sanctions and financial isolation on Russia’s economy,” the MSCI notice said.
Many firms have halted new investments in Russia. JPMorgan Chase, BlackRock and State Street have all announced that they are exiting Russia as able, and JPMorgan also removed Russian debt from its tracking indexes.
You can thank an increasingly untenable financial situation for both the country and its investments alike. Debt rating agencies S&P, Fitch and Moody’s lowered Russia’s credit rating to at or near junk status as of March 3, a full five days before MSCI made its latest downgrade.
ESG was at least part of the conversation. These debt rating agencies incorporate environmental, social and governance considerations when they are believed to be “material,” or important to a company’s financial performance.
Fitch, for example, cited its incorporation of country-level World Bank Governance Indicators for political risk and rights in its credit assessment. Moody’s considers a country’s inability to repay debt an ESG criterion, also pointing to Russia’s poor governance and corruption.
ESG Not Exactly Hot on Russia in the First Place
A Bloomberg analysis found that only about 300 of 4,800 ESG funds held Russian companies. Bloomberg noted that several ESG funds invested in Russia in search of green or responsible companies to meet intense demand from investors. These ESG investors might have waived human-rights concerns to further goals like renewable energy.
Other ESG investors, Bloomberg noted, steered clear of Russia.
Morningstar’s Jon Hale found that ESG funds held fewer Russian companies than conventional funds.
“Sustainable emerging-markets equity funds have, on average, just 1.8% exposure to Russian equities, nearly two-thirds less than the overall category average.” Hale notes that in most cases, Russian companies are ESG laggards and don’t meet fund criteria.
The question going forward is whether future ESG criteria will take a longer, harder look at investments in autocracies.
Ellen writes on environmental, social and governance (ESG) investing and sustainability. She was an ESG manager and analyst at Calvert Investments for 15 years, focusing on climate change and consumer staples. She served on the sustainability councils of several Fortune 500 companies, led corporate engagements, and filed shareholder proposals.
Prior to joining Calvert, Ellen was a program officer for Winrock International, managing loans to alternative energy projects in Latin America. She earned a master’s from University of California in international relations and Latin America. She is fluent in Spanish and Portuguese.
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