The Ukraine flag, flapping in the breeze against a blue, lightly cloudy sky

Investors and geopolitical pressures: risks and responsibilities; interests and values

By Bennett Freeman and Harriet Moynihan, Associate Fellows in the International Law Programme at Chatham House


The last decade has seen the emergence of ‘stakeholder geopolitics', with companies and investors facing growing public expectations to act responsibly as they exert increasing influence on global governance. Multinational corporations and institutional investors are being increasingly encouraged to embrace a new geopolitical corporate responsibility as a pragmatic agenda not only to ease the climate and inequality crises but also to support peace, justice, and strong institutions, consistent with UN Sustainable Development Goal 16. In June 2021, the UN Global Compact published the ‘SDG 16 Business Framework: Inspiring Transformational Governance' that encourages companies and investors alike to support public institutions, laws, and systems as the building blocks of good governance at [both] the international, regional, and national level, and as the underpinnings necessary to sustain stable, resilient, and profitable business environments. 


Calls for business to do more to support the international rule of law, strong institutions and civic space are in part growing because pressure on these crucial building blocks is rising, with illiberalism and populism persisting, geopolitical tensions intensifying, and civic space shrinking around the world. The rules-based international order underpins the global economy. Multinational corporations and their investors have been among the greatest beneficiaries of the continuity and vitality of that order over the last 75 years since its creation amidst the ashes of World War II. Trade and investment, innovation and entrepreneurship, markets and customers: all depend on the continuity and efficacy of rules and standards. Asset owners and managers share unique risks—and distinct responsibilities—to support the rules-based order, which is the anchor for transparency and accountability, as well as individual and commercial freedoms, at this time of severe stress. 


But multinationals and institutional investors face cross-pressures of increasing complexity and intensity in this turbulent world and are being forced to make hard choices with intertwined geopolitical, ethical and material dimensions. They are grappling with how to respond to significant geopolitical crises, including Russia’s invasion of Ukraine and U.S.-China tensions; how to diminish the climate crisis and absorb the rapid transformations created by AI; and how to comply with a growing body of disclosure requirements related to human rights and social issues, including supply chain transparency, and diversity, equality and inclusion (DEI). In the face of these challenges, companies and investors must balance the diverse and sometimes diverging interests of home and host country governments, shareholders and stakeholders, and employees and communities. 


Some investors are rising to the challenge. In recent months, large numbers of institutional investors have supported statements and initiatives to support peace, justice and strong institutions in armed conflict situations where the rules-based international order is at stake alongside the fate of individual nations and their civilian populations. There are also signs that investors are becoming more attuned to the fundamental link between a stable business environment on the one hand, and robust rule of law, strong institutions and healthy civic space on the other, and are prepared to take action, especially where a deterioration in the rule of law and civic space leads to declining commercial stability.


Investors and armed conflict

Investors have taken clear stands on three recent armed conflicts which have produced significant human rights violations and humanitarian crises.


First, following the February 2021 coup, a July 2021 Investor Statement on Human Rights and 

Business Activities in Myanmar called on “companies to uphold their corporate responsibility to respect human rights by undertaking enhanced human rights due diligence.  The Investor Alliance for Human Rights, Heartland Initiative, the EIRIS Conflict Risk Network, and other investor advocates have continued to engage companies to assure accountability, either for their continued presence or responsible exit. 


Second, a May 2023 Investor Statement on the escalating violence by military factions in Sudan coordinated by the Investor Alliance for Human Rights, EIRIS Conflict Risk Network, and Heartland Initiative noted that ‘the restoration of the political transition towards an inclusive, civilian, democratic government underpinned by respect for fundamental rights and freedoms is essential to a stable and prosperous Sudan with a thriving civil society and economy.’ 


Third, Heartland Initiative organized a May 2022 Investor Statement on the Crisis in Ukraine, which “strongly condemns the Russian military invasion and the ongoing war of aggression against Ukraine” and urges enhanced human rights due diligence and other steps to “advance the investor and corporate accountability necessary for a functioning global economy and the rules-based international order.”  In addition, the Investor Alliance is a member of the B4Ukraine coalition, which emphasized in its July 2022 Declaration that “Russia’s attack on Ukraine is an attack on the rules-based international order.” Hundreds of foreign companies have exited Russia over the last 18 months, while hundreds of others remain amidst intense scrutiny during this potentially defining challenge to geopolitical corporate responsibility.


Russia’s attack on Ukraine has given overdue impetus to conflict-focused human rights due diligence. The June 2022 Heightened Due Diligence for Business in Conflict-Affected Contexts: A Guide, developed by the UN Development Programme and the UN Working Group on Business and Human Rights, outlines approaches that companies and investors can apply to meet their responsibilities to identify and address their actual or potential adverse impacts on conflicts and human rights at a critical time. But Russia’s invasion has also underlined the need for human rights due diligence to be combined with a broader political and geopolitical risk analysis to enable companies and investors to identify and mitigate more systemic risks to democracy and the rule of law.


Investors and civic space


Business and civil society benefit from a shared space defined by the rule of law, accountable governance and the civic freedoms of expression, association and assembly that are essential to the realization of all human rights. Both the reliance of business on civic space—and its responsibility to protect it— were addressed in a June 2021 Chatham House Synthesis Paper, The Role of the Private Sector in Protecting Civic Space.


Yet the crucial relationship between investors and civic freedoms largely remains a relative blind spot in the ESG field of vision, although there has been some notable guidance for investors on safeguarding human rights defenders. This issue is explored in depth in a new July 2023 Chatham House research paper “Investors and the ESG blind spot: Upholding civic freedoms as part of geopolitical corporate responsibility.” The ‘S’ in ESG has been gaining attention in recent years, but too often, it is conceived restrictively, to cover a limited set of issues (such as supply chain transparency; modern slavery; worker rights; DEI) which, while important, are only part of the ‘social contract’ that binds business and society together. In order to engage on, and show support for, the broader issues of the rule of law, strong institutions, and civil society space, investors need to adopt a broader and deeper approach to the societies with which they interact. Currently, there are various barriers to them doing so. These include short-term decision-making based simply on credit risk; political sensitivities in relationships among investors, companies and host governments; the difficulty of measuring and integrating civic space issues into traditional investor methodology; and insufficient internal governance to support attention to these issues. 


Nevertheless, 2023 has seen some investors demonstrate concern in situations where there are threats to rule of law and civic freedoms. To take a couple of recent examples:


Many venture capital funds have moved money out of Israel in response to attempts to curtail the powers of the judiciary, with over £20 billion in capital relocated since the coalition government took office in December 2022. Following the enactment of those reforms in late July, which would significantly degrade the rule of law by weakening the judiciary’s ability to hold the government to account, Morgan Stanley cut the country’s credit rating, Citibank warned against investment and Moody’s warned of “negative consequences for Israel’s economy and security situation.” 


Investors are also becoming increasingly concerned about the implementation of the National Security Law in Hong Kong, which has been applied broadly to restrict the independence of the media and judiciary, the ability of NGOs to operate, and citizens to express themselves freely. A March 2023 report by the Atlantic Council detailed how Hong Kong’s diminishing political independence and ‘fractured foundations’ are negatively affecting the business sector.


Investors as risk managers and advocates 


These recent statements and actions by investors—both on armed conflict and civic space issues—are encouraging. But beyond these specific examples, institutional asset owners and managers across the financial sector should take a more systemic and systematic approach to evaluating the potential materiality of these risks to return on investment and apply that fusion of political risk analysis and human rights due diligence to anticipate and mitigate such risks. Incentives to do so are growing, through increased regulation requiring disclosure of human rights and ESG issues, pressure from the public (including a younger generation that is quick to mobilize online), and civil society activism. As well as giving greater priority to the analysis of geopolitical and social risks internally, investors can also use their power and leverage to support the rules of the international community through shareholder advocacy and public policy initiatives, where possible working with civil society. 


The intensifying geopolitical pressures that investors face will test not only how they understand their interests and define their values on the global stage — but ultimately also how their portfolios perform in a world of conflict and crisis.


Bennett Freeman and Harriet Moynihan are Associate Fellows in the International Law Programme at Chatham House. He is a former Senior Vice President at Calvert Investments and U.S. Deputy Assistant Secretary of State for Democracy, Human Rights and Labor. She is a former Assistant Legal Advisor at the UK Foreign and Commonwealth Office and Associate Solicitor at Clifford Chance LLP.