ESG funds would have close to US$800M in Russian debt bonds

(Bloomberg) A portion of the approximately US$40 billion of Russian foreign currency debt that is now at risk of default is held by a group of ESG (environmental, social and corporate governance) funds that are designed to invest in so-called sustainable assets.

Article 8 funds, a category under Europe's environmental, social and governance investment rules, have about $800 million invested in bonds issued by Vladimir Putin's government that have a coupon due this week, according to data collected by Bloomberg.

The current value of bonds is likely to be only a fraction of the amounts reported, without a clear roadmap for how investors will be paid. As debt markets head into uncharted territory, just like other creditors who financed Putin's government, ESG (environmental, social and corporate governance) funds face deep losses and lengthy legal process.

Although ESG funds account for a small part of the total, they have still helped “finance the accumulation of a war chest in Russia since 2014,” said Sasja Beslik, author of the book “Where the Money Tree Grows” and former head of sustainable finance at Bank J Safra Sarasin AG who was recently hired by the PFA pension fund of Denmark.

“It's a brutal wake-up call,” he said.

The non-payment of Russia's foreign obligations would be the first since the Bolsheviks refused to pay or recognize the tsar's debts more than a century ago.

Russian bond holdings are the latest example of ESG investors who have assets that seem to run counter to what they preach. Data from Bloomberg shows that such funds had at least US$8.3 billion in Russian assets just before the war, including stakes in state-backed companies such as Gazprom PJSC, Rosneft PJSC and Sberbank PJSC, as well as government bonds.

Putin's government has said it will pay all its debt. But he also said that those investors from countries that support sanctions on Russia will receive a payment in rubles. If Russia does not pay, or attempts to pay foreign currency bonds in rubles, which could ultimately be a default, the consequences will affect not only the country's sovereign bond market, but also all its corporate issuers. The total impact is likely to affect a heap of Russian debt of around $150 billion.

Original Note:

ESG Funds Get 'Brutal Wake-Up Call' on $800 Million Russia Bonds

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