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March 14, 2022

Assessing a Financial Response to Russian Aggression

By David Quello

It’s difficult to watch from a continent away — one of the world’s military powers attempting to overthrow a neighboring sovereign nation by force. The instinct is strong in all of us to help.

Of course, we can make financial contributions; a gift to Lutheran Disaster Response’s Eastern Europe Crisis Response will be used in full (100%) to address the humanitarian crisis in Ukraine and neighboring countries. But people are also wondering about their savings and their degree of investment in Russian companies.

While this situation is still quite fluid, I can share information about Portico’s exposure to Russian securities and describe how our investment team is responding.

Portico Investment in Russian Companies

According to the International Monetary Fund (IMF), the Russian economy is only about 1/20th the size of the US and 1/15th the size of China. The investable market in Russia was not large and has shrunk considerably since its invasion of Ukraine, with a weight in the MSCI All Country World Index (ACWI) as of March 2, 2022, of just under 0.3% of the index.

Not surprisingly, Portico’s total exposure to Russian companies has been small and is now under 0.1% in all Portico retirement funds. From a practical standpoint, however, our exposure can be considered near-zero since little to no trading is happening and valuations are unreliable. Because we’d previously screened out six Russian companies for environmental reasons from our social purpose funds, their exposure is slightly less than our unscreened funds. But, again, exposure in all funds is practically non-existent.

Given that little to no trading in Russian securities is happening due to market closures, volatility, and sanctions, it’s almost impossible to reduce any remaining Russian holdings. Still, we are exploring our options for selling any remaining positions when and if liquidity returns to the market.

Also worth noting:

  • Major index providers have removed Russia from their Indexes, making it likely that Portico’s passive investment managers will soon not be able to include Russia companies in their portfolios.
  • Many prominent companies are proactively announcing their decision to stop doing business within Russia, although it’s difficult to tally this across all the companies in which we invest.

Possible Future Step: Screening Via Social Purpose Funds

As the ELCA’s largest institutional investor, Portico is in conversation with the ELCA’s Corporate Social Responsibility (CSR) staff to better understand how the church is addressing this matter. Our team met with CSR staff last week and determined that we are in alignment concerning potential future action related to social criteria screening and shareholder advocacy opportunities.

It’s important to note that Portico and the ELCA practice screening, not divestment, meaning that we screen out companies from our social purpose funds using the ELCA’s social criteria screens. The ELCA has created nine social criteria investment screens to help investors make decisions that align with ELCA social teachings and policies.

Most relevant to the Ukraine invasion is the human rights screen, titled Political and Civil Human Rights: Equal Access and Participation. Specifically, the screen “recommends not investing in corporations benefiting from the most egregious denial of the rights of humans as political and civic beings to have equal access and participation in legal and political decisions affecting them,” and adds that “investments might include screening companies supporting and benefitting from occupation.”

It’s important to note the language. ELCA screens call for a nuanced implementation, recognizing both the financial impact and the potential pain and suffering caused by our action. In other words, ELCA screens don’t tell us to simply sell off all Russian companies; they ask that we first consider whether a given company is, in a most egregious way, supporting or benefitting from occupation.

Portico is now working to determine the feasibility of applying the ELCA’s human rights screen to companies that may be benefitting from the most egregious denial of human rights in Ukraine. This will involve the following steps:

  • Continue the conversation already happening with ELCA’s CSR staff
  • Identify specific companies meeting screening criteria (e.g., type of business and ownership group) and consider the impact of screening on the risk and return parameters of the retirement funds
  • Likely, seek approval from Portico’s Investment & Corporate Social Responsibility Committee
  • Work with our investment managers to implement potential changes

Portico also works to influence companies we’re invested in using shareholder advocacy via all our funds (not just social purpose funds), although this process is more gradual and doesn’t typically generate quick action. Still, we are talking with CSR staff and PCUSA, our shareholder services provider, to identify opportunities to encourage company action regarding ongoing human rights violations.

We deplore Russia’s military violation of Ukraine’s sovereignty, and, together with the rest of the ELCA, will continue to explore any opportunities, within the scope of our fiduciary obligations, to stand against this kind of aggression.

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David Quello

With deep familial roots in the ELCA, David brings to Portico a commitment to helping our members achieve life-long financial well-being. He believes in using his financial expertise to help others be more financially whole so they may be well and ready to serve others. As chief investment officer, David leads Portico’s in-house investment team, collaborating with internal partners to ensure we listen and deliver the products and services our members need to better serve their missions.

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