What a grim anniversary. It’s exactly 6 months this week since 100,000 Russian soldiers and their outdated tanks rolled into Ukraine. Also, on the very date of that initial assault, we wrote a piece suggesting investors in ESG and sustainability funds should challenge the stewards of potentially $50 trillion of investment capital to be true to their “do good” promises. These were our very early requests:   

• Any debt or equity instruments directly linked to the Russian state or Putin-related entities should be sold/removed from ESG portfolios. The US has just banned the sale of Russian sovereign debt in Western capital markets.
• Follow the money. Those non-Russian entities facilitating the commercial interests of Russia, Putin and his kleptocracy should also face potential removal from ESG portfolios, or worse. Think about Mastercard and its sponsorship of a St Petersburg UEFA final. Then think about BP and its 20% shareholding in Russian oil player, Rosneft, with its $2 billion annual dividends going to BP profits.
• Weaponise banking. My own personal view is that Russian banks should be refused access to the global bank payments network, SWIFT. The counter-argument is that this punishes ordinary Russians. Perhaps there could be a more focused weapon. Banks could refuse to process transactions which occur outside Russia ie make travel and overseas spend for Russia-connected individuals incredibly difficult.”

Arguably, the international political and investment community has been proactive on those requests. However, these actions have not been enough. Russian forces are still pounding Ukraine with artillery barrages and a civilian death toll well into war crimes territory. The direct human losses are, of course, uppermost in our minds but the shockwaves inflicted on food and energy supplies have spread the pain across the world and contributed to governments toppling in Sri Lanka and Pakistan. A global recession would only add to the misery and the following data does not augur well for this winter:

• Electricity prices are now above €600/MWh in many European countries, including the UK. That has the equivalent impact of oil reaching prices above $1,000 per barrel. Spot oil prices(for today) are currently trading below $100 per barrel. This is 1973 on steroids.
• US new home sales have cratered 50% from their 2020 peak. Inventory for sale numbers(unsold) rocketed by 28% in July to a level not seen since 2008(!)
• German manufacturing, Europe’s engine room, is right on the front lines in the energy war with Russia and it is battling soaring operational costs. The just-published German Producer Price Index which tracks cost inflation for businesses clocked a whopping 37% year-on-year increase for July.

We could trot out lots of other gloomy headlines and throw a winter wobbly but let’s focus on one critical aspect of this crisis. It’s gas, and it’s not funny at all. Specifically, Russian gas supplies(or lack of) to Europe are disrupting electricity pricing for industrial and residential consumers. For illustration, the additional cost of energy in UK this year is expected by ex-Chancellor, Rishi Sunak, to cost £100 billion. Now let’s return to our reference to “spot oil prices” in the earlier data development. There’s a real danger the commentariat, governments and the business community are thinking too short term. Spot prices are literally today’s prices. In the commercial world of commodities (food, oil and metals etc) longer term contracts and hedging(insurance)strategies are not struck on a daily basis. Ask Ryanair. So here’s a few other things to consider about commodities on a longer-term basis:

1. Commodity spot prices are incredibly volatile. The reference to spot oil prices was deliberate. Anyone rember spot oil prices being negative – yes, you were paid to take possession – as recently as 2020?
2. It doesn’t take much to dramatically shift the equilibrium in commodity spot prices. Now think about the various long-term substitution strategies being considered by consumers of gas. The shift to renewable energy sources has accelerated exponentially. The Japanese are going back to nuclear power options. Even the hapless Germans are having a strategic re-think on nuclear energy.
3. Commodities fear technology. Think coal. Irrespective of sustainability and ESG goals, technology is changing consumption trends and behaviours. Now think electric vehicles, new battery chemistry, hydrogen power and small modular nuclear reactors.

Now here’s another thought. Should governments take a longer term view on gas prices? To use the UK as an example, government Covid supports cost the Treasury £350 billion. What’s to stop governments entering into long term pricing contracts(say 2 years) with industry and consumers at an agreed/payable level? Then, when spot prices fall (and, oh boy they will) below the agreed contract price, governments will be able to recoup their subsidies. As in the Covid pandemic, it would be preferred that governments act in concert/solidarity to avoid unfair pricing differentials post the crisis period. Bluntly, there needs to be far more creative thinking in government and financial circles to combat Russian financial attack. Also, a final thought on solidarity and on how marginal moves can have a huge impact on commodity prices. In a spirit of solidarity with Ukraine how hard would it be for most healthy individuals to target a 25% reduction in their heating, energy consumption? Turn the lights off, have a cold shower, wear more layers. It might be inconvenient but you might actually be delivering the “S” in ESG and sustainability. Furthermore, you might be turning yourself into a financial weapon. How might it feel to be part of the first social attempt to turn the financial markets on their head, in a good way? Do good.