The chief executive of Newton Investment Management said ESG funds should be able to invest in defence companies, because national security is part of a “common good” and responsible shareholders are needed to hold weapons manufacturers to account.
“Defence companies should be part of the sustainable remit,” Euan Munro told Financial News.
“The question now is whether security is a common good that ESG portfolios could and should invest in. My view is that it is a common good.”
Big investors have historically balked at allocating capital to defence stocks, believing exposure to a sector that produces weapons designed to harm or kill people is contrary to their approach to ESG investing.
Defence companies have been thrown into the spotlight since Russia’s invasion of Ukraine in February, with some arguing that weapons manufacturers also play a role in protecting civilians and societal values during a time of rising geopolitical tension.
“Defence is likely to be increasingly seen as a necessity that facilitates ESG as an enterprise as well as maintaining peace, stability and other social goods,” Citigroup analysts wrote in a 2 March note.
According to the Citi research, defence stocks tend to attract significantly lower ESG ratings than other sectors, scoring worse than oil, tobacco and mining stocks.
However, the war in Ukraine has prompted some funds to reverse their stance on weapons makers.
Swedish financial group SEB said last month it would allow some of its funds to invest in the sector, overturning a blanket ban introduced in February 2021 that prevented them from investing in companies that derive more than 5% of revenues from the defence industry.
The company said “the serious security situation and growing geopolitical tensions in recent months — which culminated with Russia’s invasion of Ukraine — brought this issue to the fore from a policy perspective and resulted in a changed position among some of the fund company’s customers regarding investments in the defence sector.”
However, SEB funds — and those managed by Newton IM — will continue to exclude companies that make or sell weapons that violate international conventions, such as cluster bombs or those involved in producing nuclear weapons.
Munro, who took on the top job at Newton IM last June, said: “I understand if [defence companies] might be excluded from ethical portfolios where investors explicitly want a more pacifist approach. But as a society, I think most people would agree security is part of a common good and it should be overseen by people who care.”
The fierce debate around the place of defence stocks in ESG funds comes as the European Commission grapples with creating a taxonomy on social investing — a yet-to-be-finished framework which weapons manufacturers have lobbied to be included in.
Any proposals to include the defence sector within a sustainable investment framework are likely to meet fierce opposition.
Lucie Pinson, founder of sustainable investments campaign group Reclaim Finance, said allowing defence companies a place within ESG funds would be “a sign of our failure to transition towards a sustainable and peaceful world”.
“The war led by Putin in Ukraine underlines one more time the links between fossil fuel, climate change, social conflicts and war. Investing in defence companies is not going to stop the war, the same as investing in [carbon capture and storage] does not stop climate change.”
She added: “Selling weapons is about triggering opposition between groups. It goes against the very idea of common good.”
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