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If you’re an investor who wants to put your money where your values are, Russia’s invasion of Ukraine raises both technical issues about divesting Russia-linked securities and deeper questions about what it means to be socially responsible in times of war.

Canadian funds that carry the environmental, social and governance, or ESG, label hold very few – if any – Russian stocks and bonds. But investors may have indirect exposure to the country through the securities of foreign companies that continue to do business there, experts note.

There are also questions about shifting moral imperatives. Is it now ethical to hold stocks in Western weapons manufacturers? Does the world need more oil and gas from democracies such as Canada and the U.S. despite the mounting threat of climate change? Should investors rethink their involvement in China, the world’s most powerful autocracy?

“In the world of sustainability and responsible investing, lots of tricky conversations are being had,” said Timothy Nash, founder of Good Investing, which helps clients invest according to their beliefs.

Those conversations now typically start with the obvious, Mr. Nash said: Many investors want to make sure their portfolios are free of stocks linked to Russia.

For Canadian portfolios, Russia-listed stocks are typically found in emerging market funds or those with the BRIC designation, which stands for Brazil, Russia, India and China. HSBC’s BRIC Equity Manager, for example, stands out among Canadian funds for its Russia exposure, with the country accounting for roughly 22 per cent of the net holdings as of the end of 2021, according to Morningstar data.

Overall, however, average Russian equity exposure for Canadian funds was already small before the start of the invasion, standing at just 0.13 per cent as of the end of last year, noted Ian Tam, director of investment research for Canada at Morningstar. For Canadian funds that label themselves as sustainable, that was even smaller, at just 0.07 per cent.

Since then, several funds have said they had already started selling off their Russian assets in the weeks running up to the beginning of hostilities. Also, S&P Dow Jones Indices, MSCI Inc. and FTSE Russell have all announced they are removing Russian listings from their indexes, which are tracked by investment funds around the world.

Still, offloading any lingering Russian holdings has generally become a moot point since trading in the country’s securities has almost ground to a halt, said Benjamin Felix, portfolio manager at PWL Capital.

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A thornier question is identifying any holdings in non-Russian companies that remain active in the country, Mr. Nash said.

While the war has triggered a corporate stampede out of the country, with global giants ranging from Apple to McDonald’s pausing or ceasing business in the country, some global giants continue to operate there.

If you’re ready to comb through your holdings looking for any indirect ties to Russia, you’ll find that larger conglomerates often report revenue sources segmented by region, which may help you gauge your exposure to specific countries, Mr. Tam noted.

But the ethical questions raised by the war in Ukraine go well beyond Russia-proofing your portfolio.

Swedish financial services group Skandinaviska Enskilda Banken, for example, said some of its clients now want to invest in weapons makers. The company, which has committed to investing according to ESG standards, recently said it would allow some of its funds to increase their exposure to the defence industry.

Investors focused on social responsibility typically avoid manufacturers of particularly heinous weapons, such as land mines and cluster bombs, and some exclude the defence sector entirely. But defence products can now be seen as essential to helping Ukraine and defending Europe. The defence industry has seized on public outrage over the Kremlin’s aggression to argue for relaxing ESG rules, said Jon Hale, director of sustainability research at Sustainalytics.

“The defence industry in Europe has used the war as a reason to suggest that weapons manufacturers belong on the [European Union’s] list of activities contributing to social sustainability,” he said.

The conflict in Ukraine has also lent new ammunition to the long-standing argument, championed by supporters of Canada’s oil and gas producers, that global energy security requires more production from stable, democratic countries.

“Alberta oil is better than dictator oil,” Alberta Premier Jason Kenney recently said, referencing Russia’s war in Ukraine.

Environmentalists, for their part, argue that stronger commitments to renewable energy would have lessened Europe’s energy dependence from Russia.

But far from leading some to re-examine their portfolios, the current discussion around energy security seems to have investors on either side of their debate doubling down on long-held beliefs, Mr. Nash said. “This has made these two camps, I think, now even further apart,” he said.

But Russia’s actions raise a more uncomfortable question around investing in autocratic countries, Mr. Hale said.

“Russia’s war on Ukraine should prompt some soul searching for all investors about whether … they should be investing in other countries with these autocratic regimes, because the mere act of doing so bolsters these regimes, gives them credibility on the global stage, and eventually could result in the kind of chaos and disruption like we’re seeing in Ukraine,” Mr. Hale said.

China represents a more serious dilemma than Russia for investors, not only because it typically accounts for almost a third of assets of emerging market funds but also because of the country’s significant investment in renewable energy, Mr. Hale said.

Still, even while pondering these larger issues, Mr. Hale cautioned investors against making knee-jerk decisions based on recent events.

“Don’t make big permanent changes in direction in response to something that’s two weeks old,” he said, referring to Russia’s attack on Ukraine.

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