There are more and more stocks linked to the world of weapons in the portfolios of European investment funds that present themselves as “sustainable” because they apply ESG criteria, that is, they evaluate the impact of their investments on the environment, society (social) and corporate management (governance).
It is one of the effects of the war in Ukraine, say the numbers of a survey carried out by the financial analysis platform Morningstar Direct on behalf of the Financial Times. MorningStar calculates that in the first quarter of 2022, that is, at the beginning of the Russian invasion, the main ESG funds active in Europe and the United Kingdom had an exposure of 3.2 billion euros to the defense sector. Today, two and a half years later, investments by ESG funds in companies that produce weapons have more than doubled, to 7.7 billion euros.
Why ESG funds increasingly have stocks linked to weapons
It was partly a “passive” growth: in these two and a half years Sxparo, the index of European stocks in the defense and aerospace sectors, has almost doubled, going from 856 to 1565 points. The portfolios of arms orders of the leaders in the sector, starting with the German Rheinmetall, have filled up like they hadn’t in decades and the value of the shares has skyrocketed: the ESG funds that had already made the controversial choice to buy these stocks before the start of the conflict have seen the value of their investment rise.
In part, however, the growth in the exposure of ESG funds to the armaments sector was a specific choice. “Many investors have also accepted governments’ argument that supporting arms manufacturers, long the target of boycotts and student protests, should have positive social implications rather than downside risks,” writes the Financial Times, reporting for example the position of Sonja Laud, head of investments at Legal and General Investment Management, a London-based asset management company that manages over €1.3 trillion in investments. “The situation in Ukraine has brought to the fore the question ‘Can we really defend ourselves?’” says Laud, arguing in favor of investing in the arms sector as a choice that can be part of an ESG strategy. The underlying idea is that in the face of rising global tensions, financing arms manufacturers has a positive social impact globally.
A dangerous change of direction at the request of governments
No one in the sustainable finance sector would probably have had the courage to argue in favor of buying shares or other securities linked to weapons manufacturers in the roaring years of ESG investments (which began to slow down in 2021): the funds that bought shares of companies in the defense sector did so without publicizing it too much. However, hiding these portfolio choices is becoming difficult. ESG investment funds with a share of aerospace-defense sector shares that exceeds 5% of the total portfolio have tripled in two years, from 22 to 66, and there are borderline cases, reports the Morningstar survey, such as some “sustainable” funds from BNP Paribas or Amundi that have more than 10% of their portfolio invested in the aerospace-defense sector.
Obviously there are limits: these funds do not invest in companies that produce weapons defined as “controversial”, such as cluster bombs or mines, and they evaluate which governments they sell them to. But it is clear that many ESG investment managers have not been able to resist keeping weapons out of their portfolios. On the one hand, because they have not wanted to give up the enormous profits that investing in these companies has given in recent years thanks to the growth of international tensions between Ukraine and the Middle East. On the other hand, because they have not been able to withstand the pressure of governments, which have explicitly asked sustainable finance to also finance the defense sector, given that Russia’s attack has changed the scenario.
In Europe, it was the United Kingdom, which despite Brexit remains the financial center of the Old Continent, that was the first to insist that big finance managers stop denying funding to those who produce weapons. Last November, the EU followed suit. The European Defense Agency (EDA), an intergovernmental body that brings together the defense ministers of the European Council, asked the European financial sector to mobilize to support companies that produce weapons. In the final document, signed by all the ministers, ESG finance is asked to change its attitude, because “the fact that many ESG indices exclude companies with activities in the defense and armaments sector has far-reaching negative consequences for the defense industry, such as limiting the number of potential institutional and private investors, damaging its reputation and making it more difficult for the industry to attract talent”.
The numbers from the Morningstar survey suggest that the governments’ persuasion, which added to the stock market profits of the sector’s stocks, has already had its effects.
Italian sustainable finance is not having it
Does everyone agree on this warmongering path taken by sustainable finance? Fortunately, there are those who say no, like Etica Sgr, the savings management company of the Banca Etica Group: «As a responsible investor – says the president, Marco Carlizzi – we consider the growth of investments in companies in the armaments sector within ESG funds to be extremely worrying, especially in a geopolitical context that pushes many financial players to seek short-term profit opportunities in controversial sectors, such as armaments, but not only (just think of oil and nuclear), also through arbitrage practices, which we hope will be carefully monitored over time. Our vision, however, pursues a logic of medium-long term growth and remains firm and consistent: investing in weapons can never generate a positive social impact. Wars cause civilian casualties and devastate the social fabric, the environment and economies. For us, deploying other weapons is not the solution to seeking peace. For this reason, we have always adopted a rigorous approach that excludes investments in the defense sector from our funds, going beyond the simple exclusion of weapons prohibited by international agreements, such as cluster bombs or anti-personnel mines”.
The position on the topic of the Forum for Sustainable Finance (FFS) is decidedly similar to that of Etica Sgr. In July, together they organized a webinar on “Promoting finance for peace” and on the relationship between security and sustainability. FFS planned a technical session during the event on pension investors on the closing day of the 13th edition of the Sri Weeks (24 October – 7 November 2024): “Sustainable finance – explains the general manager, Francesco Bicciato – is based on the integration of economic factors with environmental and social ones. Consequently, according to this logic, investments in weapons cannot be considered sustainable. Sustainable investments are such because they aim to pursue economic returns by including ESG factors in decisions, analyses and investment approaches. Investments in weapons do not have the characteristics to generate positive environmental and social impacts and are therefore not focused on the search for full sustainability”.
Finally, the position of investors who refer to Catholic values, best summarized in what is written in Mensuram Bonam (MB), the first guidelines on investments “consistent with the faith” published in November 2022 by the Vatican. Where armaments are included among the exclusion criteria: “Military conflicts – we read in MB – always have a cost in human lives. The uncontrolled proliferation of weapons often facilitates many explosions of violence and undermines a secure peace. Consequently, the industries that thrive through the production of these instruments of war and destruction are involved in a reprehensible activity”. Unequivocal.
This article is originally published on avvenire.it
