Sanctions have evolved into a structural investment risk factor that is increasingly surfacing inside portfolio holdings only after losses or compliance issues emerge, according to a report by CityWire citing analysis by Morningstar Inc.
At a recent webinar hosted by Morningstar, analysts and sanctions experts warned that the expanding scope and complexity of global sanctions regimes are reshaping equity outcomes and portfolio construction considerations, particularly across mutual funds, ETFs and multi-asset strategies.
Speakers highlighted that sanctions, once largely broad country-level measures, have become more targeted and granular in nature, reflecting policymakers’ efforts to limit wider economic disruption while maintaining pressure on specific entities and sectors. However, this shift has also increased the difficulty for investors to fully map exposure across layered fund structures.
Sanctions have moved from a geopolitical backdrop consideration to a more direct driver of capital loss, particularly following Russia’s invasion of Ukraine, where global markets were exposed to rapid policy escalation and asset restrictions.
Sietske Moshuldayev, geopolitical and sanctions specialist at Morningstar, noted that modern sanctions frameworks are increasingly designed to be precise rather than blanket in nature.
The intention, she said, is to reduce unintended economic spillovers while still applying financial and political pressure on designated actors and sectors. However, this precision has made tracking exposure more complex for institutional investors.
The impact on listed equities was most clearly demonstrated in Russia, where multinational companies with significant local operations faced abrupt asset impairment and divestment challenges.
Michael Field, chief market strategist at Morningstar, pointed to energy group BP’s stake in Rosneft, which generated substantial earnings contribution prior to sanctions. Its subsequent exit resulted in multibillion-dollar losses, with recovery significantly below initial investment value.
Similarly, Carlsberg’s Russian operations were ultimately nationalised after negotiations with authorities failed to secure a structured exit, resulting in a near-total loss of value for shareholders.
These cases underline how sanctions-driven interventions can translate into immediate equity write-downs, often without sufficient time for portfolio adjustment.
While direct holdings are relatively identifiable, speakers highlighted that indirect exposure within pooled investment vehicles presents a more complex challenge.
Jeff Teahan, sanctions product specialist at financial crime data provider BIGTXN, said institutions often lack full transparency over underlying fund holdings, particularly across multi-layered structures.
Morningstar data cited during the discussion screened approximately 100,000 sanctioned securities and identified around 800,000 instances of exposure across managed funds when assessed two levels deep, underscoring the scale of embedded risk.
Examples included multi-layered exposures in sovereign debt, sanctioned corporates, and special purpose vehicles linked to sanctioned issuers, highlighting how indirect holdings can persist even in diversified institutional portfolios.
The discussion also emphasised a shift in regulatory focus from enforcement after breaches to assessment of control frameworks and governance standards around sanctions screening.
Regulators are increasingly examining whether asset managers can demonstrate adequate systems to identify and manage exposure, even in cases where no direct violation has occurred.
Past enforcement cases involving major financial institutions were cited as examples of regulatory scrutiny being applied to control deficiencies rather than intentional breaches, reinforcing expectations for proactive monitoring.
Industry participants concluded that while indirect sanctions exposure does not always translate into immediate legal breach risk, it is becoming a key area of operational and reputational scrutiny.
