In a nutshell

Within this report, we assess the potential implications following Russia’s invasion of Ukraine from an ESG and sustainability perspective. We argue that the ‘democratisation of capital’, which characterized the world system following the collapse of the Soviet Union may have come to an end. Investors need to consider that we have seen 16 consecutive years of decline in global freedom such that today 38% of the world’s population live in “Not Free” countries, the highest proportion since 1997.  Our conclusions are:

  • ESG and Sustainability considerations will become more relevant for investors following the invasion of Ukraine. Companies cannot just look at the maximization of financial returns without taking into consideration Governance and Social components of the countries they operate in and with whom they do business with. Milton Friedman’s belief that the only responsibility of companies is to maximise financial returns[1] is, put simply, a relic of the past, as we have argued previously[2]
  • The definitions and thresholds for sustainability and ESG investing will evolve towards investors taking on greater responsibility for system stewardship. Asset owners, both at an institutional and retail level, are likely to face more scrutiny. They will be expected to encourage, on behalf of their investees, governments and society to improve social practices, governance standards and regulations regarding the rule of law, democratic practices, corruption, human rights, equality, alongside environmental and climate priorities
  • Ethical considerations will become more prominent in assessing financial Intermediaries. The primary focus will be on ensuring a match between the ethical standards of the providers of capital and the ultimate user of that financial capital at funds level, but questions will be asked if an intermediary is involved in other controversial businesses and practices
  • We expect investors’ attitudes will shift and become more conservative. Investors may no longer provide the benefit of the doubt to companies and countries that have been sitting on the fence or providing implicit support to autocratic regimes
  • Defense spending is becoming more acceptable in Europe as the idea of a ‘free’ world fades away, possibly paving the way to changes in investment taxonomy for European sustainable funds

Investors and politicians will accelerate efforts to become clean energy independent through renewables and energy efficiency, but in the short-term higher coal usage is on its way as environmental risks may take a backseat versus national security


Ever since the collapse of the Soviet Union and following China’s entry to the World Trade Organization in 2001, capitalism entered a new chapter, where production would take place in one location while consumption was undertaken elsewhere. Large trade imbalances would be accepted under the premise of common prosperity and which would become the world’s new and improved economic system. The underlying presumption was one where the Western Economic Model based on democratic institutions and the respect of international laws would eventually become the norm in the most important developing countries in the world, including countries that were previously following the Communist model.

At first glance, this western economic model has reigned supreme as the idea of global capital was not dented by the events of 9/11, which was deemed as an attack on the western capitalistic model. Nor was it derailed by the 2008 financial crisis, and it has so far proved resilient to the COVID-19 pandemic. But the model, which we define as the ‘democratization of capital’ and which has supported capital flows over the past 35 years, may now recalibrate in the wake of Putin’s war in Ukraine.

Democracies are built on the separation of powers, ensuring that there are proper checks and balances in place to avert any abuse of powers. This is relevant for the capitalistic model, which is also built on the separation of ownership from control[3]. The independence of such roles and institutions plays a pivotal role in the democratization process.

Society, investors and the private sector have taken this model and its benign assumptions for granted. If the independence of institutions did not exist in communist states and elsewhere, it was expected that they would be created and would eventually take hold to ensure the proper governance and working of capital markets.

This naïve assumption or misplaced optimism that financial capital would deliver democratic institutions may have its origins in the successful integration of many eastern European countries into the European Union between 2004 and 2013. But what we have witnessed elsewhere and for more than a decade has been an issue of ‘form versus substance’, that is to say, institutions which give the impression of a democratic state, but their lack of independence means any trace of democracy is an illusion.

In hindsight, there have been many examples over the past decade that have indicated that we passed the peak when it came to the “financial capital driving democratization” movement. For example, the suppression of the 2011 Arab Spring protests, Russia’s annexation of Crimea in 2015 and a tightening in controls on societies and freedoms in countries as far afield as Afghanistan, Hong Kong, Nicaragua, Turkey, Sudan and Venezuela. According to Freedom House[4], we have witnessed 16 consecutive years of decline in global freedom such that today 38% of the world’s population live in “Not Free” countries, the highest proportion since 1997. Even India, hailed as the world’s largest democracy, was downgraded last year from a “free” to only “partly free” society following discriminatory policies affecting the Muslim population and crackdowns on the media, academics and civil society groups[5].

When it comes to Russia, it is argued[6] that the private sector’s prioritization of market reforms instead of political reforms after the collapse of the Soviet Union shaped the trajectory of Russia’s development. It was the notion that market liberalization would somehow lead to a proper working of capitalism and political reform.  

But, there have been serious questions of the effectiveness of the ‘benefit of doubt’ approach which has allowed Russia to become part of major investable benchmarks. This has been permitted on the basis that allocating capital to Russia is equivalent to investing in US or Western European stocks. This idea needs reassessing given the intrusion either directly or indirectly of the Russian government in Russian listed companies’ operations. Our own analysis reveals that of the 25 securities in the MSCI Russia benchmark, 12% are more than 50% owned by the Russian state with an additional five more companies (20% of the benchmark) where the Russian state has significant influence.

When it comes to Russia’s views on western institutions such as NATO and the country’s intentions towards Ukraine, these have been revealed many times this century. For example, in Putin’s speech at the Munich Security Conference[7] in 2007, the annexation of Crimea in 2014 and the Russian President’s essay on Russian-Ukrainian relations published last year[8].

The tragedy has been western governments and investors have not been giving the benefit of doubt. If they had listened and acted, then the current situation could have been avoided and some mistakes avoided. For example, over the past eight years the EU’s dependence on Russian gas has risen by 24%[9].

This means that the western response to the invasion of Ukraine is being questioned because of the difficulty of putting in place effective sanctions against Russia given Europe’s dependency on Russian oil and gas and the misplaced belief that sanctioning Russian economic oligarchs would increase calls within Russia for Putin’s removal.

An analysis[10] of the oligarch structure in Russia, differentiating between ‘economic’ and ‘strong men’ oligarchs also suggest that economic oligarchs do not actually own the wealth that is attached to their names. Rather, they will only be able to enjoy their apparent wealth under the condition of supporting the Russian government. As has been seen time and again, when Russian economic oligarchs criticise the Kremlin, their assets and freedoms are simply taken away.

As a result of the above, we expect, following the invasion of Ukraine, investors to begin focusing on the political aspect of capital flows, of where the capital is operating and the political willingness of the hosting nation to promote and develop a full democratic system, based on the separations of powers and proper governance. This will mean greater scrutiny when it comes to the track record of countries in the areas of human rights and corporate governance and ultimately a stronger stance may be taken by investors on capital allocation particularly as it relates to emerging markets.

The recalibration of the western economic model will therefore continue, but some adjustments will occur faster than others. Within the remainder of this report, we analyse why that may be required and in what form they are likely to take.

Our conclusion is that:

  • ESG and sustainability factors will become even more important post the Ukraine crisis. In fact, this is something we had already highlighted in a DWS 2019 report[11] Why emerging markets are defined by ESG
  • Grey zones within the world of investments will not be casually overlooked. Take the recent UN resolution on condemning the Russian attack of Ukraine. While Russia naturally blocked it, China, India and the UAE abstained. The obvious question is whether a country can remain neutral on such issues, yet still arguing that the underlying principles of western democracy and good governance apply. Investors and citizens in these countries are likely to take a dim view. Other grey zones that will receive greater scrutiny include corruption, autocratic countries and human rights.
  • The western world has a unique opportunity to accelerate investment into renewable energy projects and energy efficiency and gain clean energy independence from Russian (and potentially broader) fossil fuel imports. This will have considerable economic and political impact given the reliance of the Russian economy on the fossil fuel sector and may have an impact on the external threat posed by Russia
  • The definition of ‘sustainable & ESG investment’ will evolve. We have seen an overnight change in what is viewed as material to the ‘sustainable’ and ‘ESG’ investor. Energy independence is now back to the top of the policy agenda in Europe. Investments in some arms and defense companies may become acceptable in future sustainability frameworks. The next step of evolution is likely to be stronger action by investors on system level stewardship

The report is structured into the following sections that help underpin the arguments highlighted above.

  • European clean energy independence
  • Sovereigns, ESG, sustainability and authoritarianism
  • A framework for ESG and sustainable investments at a nation state level: system stewardship
  • The increasing importance of “S” and “G” for global investors

1. Friedman, M. (September 1970). The social responsibility of business is to increase its profits” The New York Times Magazine

2. DWS Research Institute (September 2020). Stakeholders and shareholders: Why Milton Friedman got it wrong.

3. One may own a share of a company but it is managed by people specialized in their field and a number of institutions are either ensuring the proper operation of capital markets (exchanges, accountants, regulators) or facilitating the flow of capital (brokers, financial advisors, portfolio managers).

4. Freedom House (2022). Freedom in the world 2022. The global expansion of authoritarian rule

5. Freedom House (2021). India: Country Profile

6. Katharina Pistor (February 28, 2022) From Shock Therapy to Putin’s War

7. Politico (February 2018). The speech in which Putin told us who he was

8. President of Russia (July 2021). Article by Vladimir Putin “On the historical unity of Russians and Ukrainians

9. Eurostat 2022

10. Guardian (March 8, 2022). The sanctions strategy is flawed. To defeat Putin, you have to know how the Kremlin works

11. DWS Research Institute (October 2019). Why emerging markets are defined by ESG (


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