Russia’s war in Ukraine is a war on Europe, not just in Europe. Bloody conflict between Europe’s first and third largest armies is unravelling key European beliefs and will trigger a change in the balance of power between European countries that will reshape the continent.

The war is creating a new vulnerability and loss of confidence within the EU. It has laid bare Europe’s dependency on US security, revealing Europe as a US protectorate at a time the US is more focused on its relationship with China. It has also upended the idea that economic interdependency – aka Russia’s dependency on Europe buying its gas and Europe’s dependency on Russia for its gas – guarantees peace.

“The ability to change the world through trade has proven unlikely,” said Ivan Krastev, Chair, Centre for Liberal Strategies, European Council on Foreign Relations; permanent fellow at the Institute for Human Sciences and author of the acclaimed book, “After Europe,” speaking at FIS Maastricht.

Europe’s new vulnerability comes after years of the continent acting like a laboratory from pioneering regionalism to coming to lead the world on ideas around sustainability. “To what extent are others going to imitate us now?” he asked.

The EU has been built on an assumption that military power had lost its purchase. An idea that flourished most after US military failures in Iraq and Afghanistan. “War in Ukraine has shown that military power doesn’t matter until you don’t have it,” said Krastev, noting that Germany is now increasing its defence capabilities in a significant identity change.

Regardless of the outcome of the war, he said a major decoupling with Russia lies ahead. Goods and services Europe sourced from Russia will now have to come from somewhere else – often countries Europe doesn’t want to trade with.

“The world is changing, and we are not going back to where we were. The EU should try to reposition itself, but it has been one of the biggest winners of recent years and therefore it is in tough position.” Indeed, Europe’s success whereby small and medium sized countries have been able to outperform, makes dealing with the current crisis particularly challenging. “The EU was suited to an order that is not here anymore,” he said.

Immigration

War in Ukraine is also creating an immigration crisis as Ukrainians continue to pour into Europe. Most recently fleeing as Russia destroys critical infrastructure in cities in western Ukraine like Kiev: around 7 per cent of households in Poland now house refugees at a time the cost of living is going up. The refugee crisis also has profound costs for Ukraine which is experiencing major depopulation of mostly young people (women and children) who will integrate outside the country and are unlikely to return.

Power re-balance

The refugee crisis marks a rebalancing of power in Europe. Ukrainians have been welcomed into eastern European countries which have had little immigration to date. Now these countries are questioning France and Germany’s leadership of the EU. Poland, particularly, is wanting this crisis to lead to a redistribution of power and greater recognition of the political price the country is paying. “Poland needs to be heard,” said Krastev. “The Polish army will be stronger than the German army; the relationship between east and west is changing and levels of arrogance and provincialism are changing.”

EU unity will also be challenged when it comes to negotiating the peace process. Different nation states will have a different idea of the peace, with some pushing for Putin’s removal. This will contrast from previous crisis like the GFC or Syrian immigration into Europe in 2014-2015 when Germany held the solutions.

Criticised for being naïve in its relationship with Russia, building too much economic dependence on Chinese demand and too much security dependency on the US, Germany has lost influence in the bloc. It amounts to a new power balance with the relationship between Germany and Poland as important now as Germany and France. “Gravity is going to move to the east,” predicted Krastev adding that the war has helped European society rediscover the power of nationalism.

A shift to the east will mark a new phase in Europe’s evolution. Many eastern European countries have had difficult histories and don’t take their existence for granted. The EU comprises culturally diverse western Europeans in Germany, France and the Netherlands, former colonial empires with a different view of sovereignty compared to ethnically homogenous eastern Europeans with different sensibilities. The same distinction is visible in eastern Europe’s largest companies which still mostly trade in Europe rather than overseas, he said.

China / US

Europe will feel the heat from growing tensions between the US and China. For example, it is leading to new trends in friend-shoring, creating shorter supply chains and heightening the risk around data sharing, forcing corporates to change strategy. “Decoupling means you must ensure countries are on your side in the supply chain,” said Krastev. “The difficult relationship between the US and China gives Europe less room to manoeuvre.”

Risks

Krastev said that Europe will pay the price for the destruction of Ukraine more than the US where Republicans are trying to change levels of support. He flagged that Germany’s tolerance of high inflation is low and said that politicians will struggle when young Europeans feel like they are the losers. But he concluded with a hopeful message that Europe has the capacity to change. “Europe acts only if it is pushed into a corner. Our system changes in dramatic times, and that sense of drama is now here.”

 

The 2050 energy transition will not happen in a way people predict, said Stephen Kotkin, Senior Fellow at the Hoover Institution and at the Freeman Spogli Institute, Stanford University, and Birkelund Professor Emeritus at Princeton University.

In a sobering address that spanned war in Ukraine and the resilience of the west against threats from Russia and China, Kotkin said the current energy system will survive into the new system, and oil and gas won’t disappear – wind and solar will not replace fossil fuels at scale.

“We are not going to get there; something is happening, but not what we are imagining,” he told delegates at the Fiduciary Investors Symposium in Maastricht.

Cement and steel production, plastics and fertilizers, all essential for everyday life, cannot be produced with renewables.

“There will be a transition, but it will look different,” he said.

Ways forward need to focus on the production of these types of materials before it is possible to talk seriously about a transition. Alternative solutions could include small-scale nuclear reactors that produce hydrogen than can power steel production.

“Innovative countries may be able to do this,” he said.

Kotkin also said that policy makers have failed to put a price on carbon, and subsidising wind and solar does little to spread take up of wind and solar, or reduce carbon.

War in Ukraine

After months of war, Russia is on the losing end of the story, and much weaker than its population imagines.

“Russia is not a power in the first rank and there is a gap between aspirations and capabilities,” he said. Russia is now a personalist regime, and the gap between the west is wider than ever.

Kotkin said that Russia didn’t appreciate the strength of the Ukrainian regime or Ukrainian resistance.

“Russia failed early in Ukraine,” he said adding recent strategy sees Ukraine conducting an offensive on the weakest part of the Russian line. The approach has shown allies in Europe and the US that Ukraine is capable of conducting an offensive assault, and has demoralised the Russians.

But Ukraine has to evict Russia, dug in and currently occupying 16 per cent of Ukrainian territory. Ukrainians have switched to a cold war battle plan, hitting fuel stores and causing disarray behind Russian lines. Now the Russians are disrupting the Ukrainians behind their lines too, striking critical infrastructure.

“How do you fight a war without power supply?” questioned Kotkin. “Russia is degrading Ukraine’s ability to fight.” He warned that Ukraine’s communication network could be next.

“The war is not won, Russia’s tactics have gotten better.”  All the while, Ukraine’s ability to fight will increasingly depend on European taxpayers money.

American power

Reflecting on western resilience, Kotkin listed a series of positives. American financial power is not about to be eclipsed and there is no threat to the US financial system. Mostly because there is no alternative to replace the dollar.

“Unless there is an alternative, it can’t be displaced,” he said, adding that digital currencies have been slow to evolve.

Nor is there a substitute for American military power. Despite follies in Afghanistan and Iraq there is no superior military system to the US. Still, he noted that American superiority involves moving from old platforms to smaller, more mobile systems.

“We’ve seen it in Ukraine,” he said, describing the evolution of US military away from old aircraft carriers that are vulnerable and take forever to build, to new weapons and software-driven military. A key challenge ahead will involve overcoming a procurement system tied to jobs in specific districts across the US.

Kotkin praised European regional integration. Despite problems and disappointments, European integration works as do other regional systems like ASEAN and in North America.

“The US and Canada are really a single economy; Mexico is almost there too,” he said.

Although these groupings are not the same as the EU where a regional court overrides national jurisdictions, he called them “impressive.” Together, these regional blocks make up a globalized world, part of an open, flexible world we all benefit from. War in Ukraine has made people want to hold onto and preserve these freedoms, he said.

Cutting the other way

Despite the many positive forces combining to help the preservation of the western system, equally powerful forces threaten its existence. Democracies find it difficult to assimilate social media and the internet in contrast to authoritarian regimes that harness it to their advantage. It led Kotkin to reflect on how democracies assimilated radio in the 1930s. The crazy technology that could broadcast into homes was highly disruptive at the time and used by dictators like Mussolini and Stalin as a source of empowerment. Overtime it was assimilated and this may also be said of social media.

Kotkin also warned of the implications of a continually squeezed middle class in successful democratic societies.

“The current system works well at the top,” he said. The super wealthy are shielded from the consequences of the decline in public services. The system works (mostly) at the bottom too, where “strivers” can progress, getting on the ladder up.

Still, he noted how some countries, like Sweden, are better as assimilating new immigrant populations than other societies.

Meanwhile, some areas in the US, like Silicon Valley, don’t hold any hope for striving, aspirational new arrivals to rise up the ladder. There is very little infrastructure for people who are not at the top in Silicon Valley.

“Silicon Valley has no Queens,” he said, referring to New York’s ethnically diverse suburb.

Populations that have a squeezed middle can be a force for destabilisation. People can’t get onto a higher level because the gulf between the middle and top is too great, an issue that is exacerbated by social media.

Debt is another challenge for the western world. Compare countries assets and obligations, and many are technically bankrupt. These countries cannot meet all the promises they’ve made in a “fiscal lunacy.”

Countries may be able to grow economically and pay back the debt, but this will be challenged by demographics whilst dealing with debt in an inflationary environment is more challenging.

China

Kotkin said that China is moving in a different direction to what many people imagined. The Chinese regime is not made up of economic reformers. President Xi’s government is populated by sycophants who favour state-owned industry, he said.

China has paid a high price for siding with Russia in the Ukraine war, mostly because it destroyed the wedge China had driven between the US and Europe.

“The EU is now closer to the US,” he said. One of the reasons for China’s mistake was because President Xi has no critics to warn him of potential blunders. But Kotkin said that China has leant lessons from Russia’s war in Ukraine regarding its own ambitions in Taiwan.

Invading Taiwan risks leaving Taiwan economically ruined.

“If you take it, you get nothing; you get a smoking pile of rubble,” said Kotkin. “To take it, you have to destroy it.” Instead, China is pursuing a policy of economic strangulation and diplomatic coercion a strategy that comprises threats, intimidation and blocking communication.

Kotkin stressed the importance of investing again in the west’s resilience and power; financial systems, military alliances and societies and better management of challenging issues around social media and debt. “Victory for Ukraine is joining the West. It is Ukraine’s war but they are fighting for values we all care about.”

Check out all the latest photos from FIS Maastricht.

APG’s Claudia Kruse reflects that the climate emergency, COVID and conflict has put SDG delivery at risk. But the SDGs remain the best roadmap out of crisis and the investor’s Asset Owner Platform has become an important tool supporting its quest to invest with impact.

At APG sustainability and digitisation are overarching themes shaping strategy. Recently, the giant Dutch asset manager combined these twin pillars in a Sustainable Development Investment (SDI) Asset Owner Platform, driven by AI technology.

Developed together with PGGM, the platform sifts through reams of structured and unstructured data to gauge the extent to which companies’ products and activities meet the SDGs. “The platform combines the core themes running through APG of sustainability and digitisation,” said Claudia Kruse, managing director, global sustainability and governance, APG, speaking at FIS Maastricht “These are the skills sets for the future.”

SDGs under threat

The UN says the SDGs are the world’s roadmap out of the crisis and remain the most compelling global and all-encompassing blueprint for those seeking to achieve real world sustainable outcomes.  Meanwhile investors are increasingly incorporating risk, return and impact in a three dimensional model. But Kruse countered that the climate emergency, COVID and conflict has put SDG delivery at risk.

APG began integrating the SDGs in 2015 following requests from its major client pension fund ABP whose beneficiaries work in the government and education sectors. The platform, launched in 2020, is designed to deliver on the SDGs and support positive outcomes. It has been created by investors for investors, and is shaped around innovation and cooperation. It has also become a crucial tool in APG’s target to invest 20 per cent of its AUM in the SDGs.

The platform is used for monitoring achievement, risk management and accountability and includes progress reviews and a forward looking lens, she said. SDG analysis on the platform initially began with equities but now covers fixed income.

The platform scores companies’ products and services rather than corporate conduct, the traditional ESG lens. Enthusiasts argue that SDG scores are better at integrating impact. For example, research shows that some companies with poor SDG scores can secure good ESG scores and ESG ratings can struggle to reflect positive impacts.

Human judgement

Data is a crucial part of SDG analysis, but so is human judgement. The platform’s AI component uses natural language processing and algorithms modelled to specific topics to score and rank companies. But human judgement is important to assess platform insights on allocations with a negative contribution to the SDGs but important support for the climate transition, like transition minerals.

Analysis is focused on companies making a positive or negative contribution to the SDGs. But she noted every investor looks at the process from their own perspective and asset owners use the platform in different ways. For example, APG’s own internal portfolio managers have integrated the technology but other investors use the platform to monitor their external managers, using it to set them targets. Others use it for risk assessment and reporting.

The platform also provides key insights for investor engagement. She noted that investors have clear exclusion policies. However, the case for divestment is usually the consequence of unsuccessful engagement over time.

 

Investors have much to learn from the art world that goes beyond just investing in art for a return, or adorning their office walls with beautiful pictures. An appreciation of art will support better leadership, foster an organization’s culture and nurture diversity of thought, argued Rachel Pownall, chair of the finance department and Professor of Finance at the school of business and economics at Maastricht University.

Speaking at FIS Maastricht, she said that art brings positive externalities to an organization’s culture. Cultural experiences from visiting a museum to listening to music engender positive feelings, creating an energy that is possible to harness.

Witness the negative externality of, say, pollution that is not priced into the investment process. Access to art and culture bring a positive externality that is similarly undervalued, Powell who is founding director of the executive master in cultural leadership argued.

“Art brings a positive role within an organization that is possible to harness.”

Art investment

The investment community can buy art and hang it on the wall of their offices and homes. Art is an established asset class, but it is a small market.

True, it offers a source of diversification for investors, and record-breaking sales like Andy Warhol’s portrait of Marilyn Monroe, recently sold for $195 million fetching the highest price ever paid for an American artwork at auction, show the possible return.

Successful investors include the United Kingdom’s Railways Pension Scheme which made positive returns on art in the 1970s, a period of high inflation. Elsewhere, art has also been a source of investment amongst family offices. Microsoft co-founder Paul Allen’s art collection, up for sale this November, is expected to sell for over $1 billion.

But Pownell reasoned that few art lots sell for over a million. The art market is still small, despite growing over recent decades.

“It is clearly no space for institutional investors,” she said. She noted however that the extensive art collections at banks including Deutsche and ING offer a way to support younger artists and inspiration for employees.  “Having new contemporary art round the building is inspiring; people  choose meeting rooms according to the topic and what is on the wall. It changes the perspective of the conversation.”

Trend spotter

Art and beautiful architecture create areas where people want to work and live. Art also provides insight into key trends. Art has an “amazing ability” to provide us with a mirror image of what is happening in the world in terms of trends and the way in which society is moving over time.  She urged delegates to think about how they value culture in their organization, stressing that the younger generation seeks purpose, wellbeing and belonging as well as a culture of integrity.

Lived experiences

One of the positives to emerge from the pandemic is a new appreciation for lived experiences. This gives investors the opportunity to think afresh at how to incorporate these values – and the positivity lived experiences bring – back into their workplace culture. Art fits into a post-pandemic world where people need to touch, feel and understand. Pownall also urged investors to support creative industries. When money flows into a local economy, it has many positive externalities.

Arts also helps complex issues make sense. For example, de-colonization reflecting the post empire state is a common theme in many contemporary artworks. De-colonisation can also be viewed through the lens of an investment theme alongside other “Ds” like de-globalization, de-carbonisation or de-coupling.

“We are moving away from the notion of a globalized supply chain, increasingly thinking local and putting more emphasis on the environment around us,” she said.

Pownall argued that art increasingly represents an inclusive economy: the work of Lee Krasner is now recognised alongside her husband’s, Jackson Pollock.

She also noted how artistic people bring a diversity of thought to decision making. “Artists think differently from the financial world. By working together, art and finance could come up with amazing creative products that will help solve the challenges of the future, building and using the innovation that is within our society,” she concluded.

Compared to many other asset classes, it is easier to set carbon emission reduction targets and collectively engage in real estate. Real estate significantly contributes to global emissions, and investors are in a position to meaningfully help reduce pollution.

“You have the power to do something about it,” said Piet Eichholtz, department chair and professor of Real Estate Finance, School of Business and Economics, Maastricht University and co-founder, GRESB, speaking at FIS Maastricht.

In countries that are urbanizing, it is possible to cut emissions by building green real estate from scratch. Eichholtz said that much of the developed world has sufficient real estate. In these countries, investors should focus on the opportunity to refit and climate-proof real estate, an area Australia’s Cbus Super is increasingly focused, said fellow panellist Kristian Fok, Cbus’ CIO.

Research now clearly proves that greening real estate and improving the energy efficiency of buildings is value enhancing.

“Academic consensus states that green real estate is value enhancing,” said Eichholtz.

It is possible to measure the energy consumption of a building. This means investors can make a meaningful and measurable impact. A measurement system allows pension funds to enter a dialogue with property companies, creating a popularity contest that brings developers towards alignment with the Paris agreement.

“It is useful, and creates incentives,” he said.

For example, the Global Real Estate Sustainability Benchmark, GRESB, provides validated ESG performance data and peer benchmarks for investors and managers, looking at every element of sustainability within a building from waste management to energy and water use.

“It was a strong example of racing to the top,” Fok said.

He added that Cbus encourages its managers to use the GRESB standards, although he noted that Cbus strategy is less focused on ranking and more focused on how real estate is changing and opportunities in the sector that will make the biggest difference.

Investors can also harness the tool for engagement. This is important because academic evidence shows that engagement in real estate works in terms of improving ESG integration and boosting operational and financial performance. Eichholtz noted how engagement in real estate is also relatively easy, and it is also possible to find a collective voice.

GREEN

For example, an initiative called the Global Real Estate Engagement Network (GREEN) aims to bring collective investor engagement further to the foreground.

It combines investor voices (with a combined €2 trillion assets under management, to date) in listed and private real estate together. Eichholtz noted that most investment engagement in real estate is reactive. A preferred model is continued, persistent engagement working to rolling targets towards the Paris goals, using benchmarks and disclosure to incrementally add value.

Australia has turned from laggard to leader when it comes to integrating sustainability in real estate, said Fok. A key accelerator in the transformation came via state governments requesting minimum sustainability standards.

“This catalysed the need for premium property,” he said. The introduction of benchmarking and ratings followed, forcing Australia’s real estate players to compete and lift standards.

Fok noted how the conversation around sustainability in real estate in Australia has now moved to focus on new areas like the indigenous workforce, as well as gender equality and innovation via technology.

“Sustainability has now evolved to ensure people get paid fairly and the industry is building capacity,” he said.

Progress in the Netherlands includes labelling buildings from next year, but Eichholtz called for ambitious legislation that also bites.