Stagflation fears over Ukraine prompt investor rethink on ESG
A fifth of surveyed institutional investors fear the war in Ukraine will trigger a global financial crisis worse than the Great Recession of 2008, and almost as many will bend their ESG strategy to include weapons manufacturers.
A CoreData Research study of more than 200 global institutional investors finds 51 percent think the surge in energy prices triggered by the Russian invasion of Ukraine will drag the world economy into stagflation, when sluggish economic growth and unemployment clash with rising inflation. Investors in the Asia-Pacific region (65 percent) and Europe (55 percent) are the most concerned cohorts globally.
Alarm about the war’s impact on inflation is motivating changes in asset allocation strategies, researchers find. More than four in 10 global investors (43 percent) plan to raise allocations to assets positively correlated to inflation, including commodities and real estate. European investors (49 percent) are most inclined to increase exposure to inflation-sensitive assets amid the geopolitical turmoil.
One in five investors (20 percent) think private assets offer the best hedge against an inflation shock caused by the invasion. A similar proportion (17 percent) say their organization will raise allocations to private assets due to market volatility stemming from the crisis. This ramps up to 25 percent among Asia-Pacific investors.
Investors are also reconfiguring their ESG approach on the back of the Ukraine invasion. Half (50 percent) are set to change their ESG strategy to exclude Russian investments and they expect asset managers to follow suit – just under half (49 percent) say managers who invest in Russian assets cannot claim to be ESG-compliant.
The unfolding crisis in Eastern Europe has also prompted investors to re-examine attitudes toward investments previously deemed unethical. Almost one in five (17 percent) say they will alter their ESG strategy to permit investments in defense-related companies. Half (50 percent) remain undecided on the issue.
‘Investors are navigating multiple headwinds including inflation, slowing growth and volatility, which are emanating from an increasingly turbulent geopolitical and macroeconomic storm,’ says Andrew Inwood, founder and principal of CoreData, in a statement. ‘Investors therefore need multi-pronged investment strategies that provide both downside protection and alpha – and active managers are best equipped to deliver this.’