War and Ethics: What Are the Investment Community’s Responsibilities?

The Russian invasion of Ukraine has had ramifications throughout the global investment community. There are the obvious repercussions: increased volatility in equity and commodity markets, as well as increased inflation. But there are also more subtle effects: the war has forced investment professionals to navigate complex gray areas where their choices may be legal from a regulatory standpoint, but questionable from an ethical perspective.

The war between Russia and Ukraine is not the first conflict to affect the financial sector in these ways, but it has changed the reality on the ground for professionals. The investment community must recognize this and act accordingly. The threat of these conflicts and their consequences raise important questions that we as a community must address.

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Codes of professional standards such as the CFA Institute Code of Ethics and Standards of Professional Conduct guide people facing real-world ethical dilemmas. These dilemmas are like highway junctions with the particular code of conduct serving as a road map that tells us which lane to take. But a map is only useful if it accurately reflects reality. When reality changes, you need to adjust the map. Otherwise, those taking the wrong lane could encounter a more complex intersection further down the road.

Should portfolio managers hold shares in companies that play any role in military aggression, even when it is perfectly legal to do so? Should an advisor cut ties with a client who is directly or indirectly involved in such conflicts? Where should the lines be drawn?

Issues related to war are not unique to the investment profession, so the answers to these questions must be guided by general moral norms and principles. But there are few phenomena that do so much harm to capital markets or to society as a whole.

War poses risks not only to the profitability of the investment sector, but also to its reputation and credibility. Financial professionals or institutions that help a government wage war to overturn the rules-based world order can hardly bolster public confidence in financial markets or the investment profession.

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We must consider these risks. The Russian invasion of Ukraine has shown that war has dramatic effects that extend far beyond the front line and are difficult if not impossible to model. What seemed solid as a rock can be broken in a matter of days. Before the war, Russian stocks traded in foreign currencies. Many had “buy” ratings from major investment houses. Soon after the Russian attack, they were all worthless. Wealthy customers with established relationships found their accounts blocked. Profitable businesses had to be scrapped and companies liquidated. At one point, the market was left wondering whether the agent banks would transfer the Russian government’s coupon payments to its creditors. A year ago, these concerns would have raised more than a few eyebrows. The conflict has changed the investment landscape on such a large scale and so quickly that the rules must be adjusted to stay relevant.

The question is: what should these new rules look like? Now is the time to start this discussion. Should there be explicit rules requiring investors and institutions to disassociate themselves from war-related activities under certain circumstances? What about an exclusive screening approach?

It is never easy to find a common denominator in complicated and divisive ethical issues. Indeed, there are no perfect solutions to these dilemmas, but that doesn’t mean solutions aren’t possible. The investment industry could promote an environmental, social and governance (ESG) approach when dealing with military conflicts. This could take the form of best practice guidance or disclosures about war-related information to current and potential customers. These may include a list of portfolio companies doing business in the aggressor country or a divestment strategy detailing how the securities of those companies will be divested in the future. There is no doubt that other possible solutions will emerge in the course of these talks.

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The conflict between Russia and Ukraine has shown that the consequences of major wars are impossible to anticipate and too great to ignore. That’s why the investment community needs to come together to develop common standards that will apply when these conflicts do occur, but with the ultimate goal of preventing them from erupting in the first place.

Let’s start the discussion.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

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Oleksandr Biriuk, CFA

Oleksandr Biriuk, CFA, is an investment professional with experience in data analysis and quantitative methods. He now works at one of the leading providers of financial data. Prior to that, he spent more than 15 years at DCH Investment Management, helping to shape data-driven investment decisions.

Olga Teteruk, CFA

Olga Teteruk, CFA, is an investment professional with experience in private equity. He has been working in the sector for nine years. Previously, he participated in a one-year internship program at Robert Bosch Ltd. He passed the CFA Institute Certificate in ESG Investing in 2020.

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