The War in Ukraine Will Impact ESG Investing in Developing Countries.

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The War in Ukraine Will Impact ESG Investing in Developing Countries.

  • The conflict between Russia and Ukraine is affecting the world economy through financial sanctions, higher commodity prices, and interruptions in the supply chain. These transmission channels are jointly causing inflation to skyrocket and growth to slow sharply, especially in Europe. This situation will continue for the rest of the year. EIU (Economist Intelligence Unit) expects the shooting war to last until the end of 2022, at least before the conflict is prolonged, probably endless. Due to setbacks on the battlefield and extreme Ukrainian resistance, Russia has now mitigated its objectives; At the same time, it previously aspired to subjugate the country, and its immediate aim is now to establish control over eastern Ukraine.

The war will stretch ESG funding and investment in three ways:

First, donor countries will be pressured to freeze, if not cut, their aid budgets to address the internal cost-of-living crisis, as well as to increase defense spending. Similarly, multilateral institutions will likely refocus on more urgent priorities, while their current commitments will go less, given the higher input costs. The World Bank, for example, has announced that it is working to mobilize $50 billion in financing for the crises arising from the Russian invasion of Ukraine, including food and energy insecurity.

Secondly, projects that support the energy transition in developing countries will not be extended due to the increase in input costs. As a result, even if aid financing remains nominal, the gap between what is needed and what the aid will provide will continue to widen. Most of the largest donor countries will face significant inflationary and cost-of-living pressures and are unlikely to be in a position to expand and can even contract the provision of aid.

Developing countries have also emphasized the need for more significant financing for climate adaptation, in addition to funding for decarbonization, as the effects of climate change become more accurate. Thirdly, other funding sources will be equally limited in addition to aid financing: the mobilization of private financing was already a more difficult sale in developing countries.

More collaboration will be needed between the private and public sectors to address these impacts. Through progressive public policies and incentives, governments and companies could collaborate to leverage financial and non-financial assets and resources.

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