As luxury brands continue to do business in Russia, what about ESG?
The Russian invasion of Ukraine posed difficult questions for governments and private entities, who were forced to face “uncomfortable questions about their willingness to cut off the flow of Russian money” – and in some cases, access to Russian money. merchandise. Although the European Union has not enacted export-blocking sanctions on products such as luxury goods, meaning companies have been able to cater to the consumption habits of deep-pocketed Russian consumers without disruption, the lawsuit activities could raise problems from an environmental and social point of view. , and Governance (“ESG”) with investors who may not welcome a business as usual approach as Russia steps up its attack on Ukraine.
Russia’s war on Ukraine comes as investors around the world increasingly consider ESG factors alongside a company’s financial performance to identify growth opportunities and material risks, and demand companies are disclosing an increasing amount of ESG-related information. This global orientation has likely had an impact on Western companies, a growing number of which have announced their intention to divest themselves of their Russian businesses.
BP revealed on Sunday, for example, that it would divest its nearly 20% stake in Russian state oil company Rosneft, calling Russia’s attack on Ukraine “an act of aggression that has tragic consequences throughout the region”. Shell also confirmed on Monday that it would quit its joint ventures in Russia, with CEO Ben van Beurden saying “we cannot and we will not sit idly by” in light of the “senseless act of military aggression” by Russia. Meanwhile, Norwegian oil refining company Equinor said it intended to exit its Russian JVs, and Mercedes-Benz Group would explore options to quickly divest its 15% stake in Russian carmaker Kamaz. .
Elsewhere in the market, companies are suspending operations in Russia. Transportation giants FedEx and UPS, for example, have halted shipments to Russia, as have automakers General Motors, Volvo, Volkswagen and Daimler Truck. Delta announced that it had suspended its alliance with Russian carrier Aeroflot following Russia’s invasion of Ukraine, and American Airlines voluntarily ended its partnerships with Russian carriers Aeroflot and S7 Airlines indefinitely. Finally, British asset management firm ABRDN revealed on Tuesday that it was moving away from investments in Russia and Belarus “for the foreseeable future”, with CEO Stephen Bird citing ESG as a reason for doing so.
Such moves — coupled with reports that Russian entities are set to be removed from banks’ ESG indices — will likely put pressure on competitors to take similar action. Although it should be noted, as Axios does, that “announcing divestment plans is very different from an actual divestment, especially when the Russian central bank severely limits the sale of Russian stocks by non- residents, and that the United States prevents this bank from engaging in dollar-denominated transactions.
What about luxury brands?
In addition to weighing the impacts of sanctions (even those that would only affect them indirectly), as well as seemingly unavoidable supply chain disruptions, companies’ efforts to distance themselves from Russia are almost certainly taking ESG elements into account. . In order to avoid investor pushback, luxury brands are likely to take a hard look at their current operations in the country ruled by Vladimir Putin. With limited exposure to energy giants, business shutdown measures could be accomplished with potentially limited downside for luxury brands, given that they only generate a relatively small portion of their revenue. global revenues in Russia, where the retail market for luxury goods was around $6.75 billion in 2021.
Publicly listed brands should also consider the potential for litigation related to declining inventory in the event that they claim to observe ESG elements in their operations but continue to do business in Russia following the conflict of a manner similar to that of businesses. are increasingly named in shareholder-initiated cases for failing to comply with ESG mandates.
There have certainly been growing public calls among consumers (and potentially some quieter investors) for luxury brands to close up shop in Russia, especially following reports that European leaders were looking to to evade the sanctions aimed at Russia for the luxury industries. . Vogue Business reported this week that on February 24, Cartier owner Richemont “decided to temporarily close all of its stores in Russia, but reopened them [two days later].”
At the same time, there were reports – including from European Institute director Adam Tooze – that “panic buying of luxury goods that may have high resale value” was underway this weekend. end in Moscow in anticipation of a fall in the ruble. (The value of the Russian currency fell about 30% against the dollar on Monday, making it worth less than 1 US cent.)
As for which luxury players stand to be most harmed from a revenue standpoint in light of the dispute, Bernstein analyst Luca Solca wrote in a note that “groups that operate in the high end (e.g. Richemont) are likely to be more exposed – all things being equal. Meanwhile, Solca said “groups that cater primarily to the ambitious middle class (e.g. LVMH, Kering) are likely to be less exposed – all things being equal”, given that “demand is going to be driven by a relatively small group of very wealthy individuals, rather than a large group of middle-class consumers.
He noted that “direct exposure to” Russian and Ukrainian demand by the luxury segment today is “probably close to 4-5% overall.”
And in terms of consumers, 75% of Americans said they support companies’ plans to cut ties with Russia and stop selling products and services in the country, according to a new Morning Consult survey. The business intelligence consultancy, headquartered in Washington, D.C., found that consumers expressed “broad support, regardless of political party” for the companies’ efforts to divest from Russian entities, which constitutes ” a rare example of broad bipartisan support”.