ESG funds reinvest in Israeli arms manufacturer Elbit Systems after cluster munitions pivot

Twenty EU-designated Article 8 ESG funds have bought more than $2 million worth of shares in total in Israeli arms manufacturer Elbit Systems after major ESG data providers removed it from a list of securities associated with the manufacture of cluster munitions.

Responsible Investor has learned that ISS ESG, MSCI and Sustainalytics revised their assessment of Elbit Systems in April 2022 or earlier following “comprehensive and clear statements” from the company that advised it was no longer involved in the production of cluster munition weaponry and did not intend to engage in the production for these types of weapons in the future.

This also extends to cluster munition delivery platforms, the company had said.

Involvement in the production of cluster munitions is considered sufficient grounds for exclusion by many ESG funds and sustainability-orientated investors.

In previous years, Elbit Systems has been blacklisted by AXA Investment Management, HSBC, Deutsche Bank, KLP, Australia’s Future Fund, Storebrand, Norges Bank Investment Management and the East Sussex Pension Fund over cluster munitions and broader ethical concerns relating to activities in the Occupied Palestinian Territories.

More than half of the ESG funds currently invested in Elbit are actively managed products sold by Lazard, Russell Investments, BlackRock, Sweden’s Länsförsäkringar and Eastspring Investments, according to Morningstar data. The remaining funds comprise index funds administered by UBS, WisdomTree, State Street and BlackRock/iShares.

None of the funds held Elbit shares prior to April 2022.

Managers of thee funds affected declined to comment or did not respond to requests to do so.

AXA IM, NBIM and KLP have confirmed that they continue to exclude Elbit Systems. Other investors with prior exclusions to the company were unable to clarify their current holdings or did not respond to requests for details.

KLP’s responsible investments head Kiran Aziz told Responsible Investor that she considered Elbit’s move away from cluster munitions “a positive change”. Nevertheless, she said KLP’s assessment of the company remains unchanged based on the risk of complicity in serious violations of fundamental ethical norms.

“KLP has a strong position with regards to activities of companies in the West Bank and has excluded several companies which, according to our assessment, are contributing to the abuse of human rights in situations of war and conflict through their links with the Israeli settlements in the occupied West Bank,” said Aziz.

Elbit Systems is currently flagged by Sustainalytics for its provision of equipment to the Israeli military, linked to the wall separating Israel and Palestinian territory.

A spokesperson for the data provider said that alleged human rights issues are relatively common among defence companies, which can lead to higher financial risk exposure. There is also a lower-level controversy flag related to arms exports and emissions, which is also common in the defence industry, they added.

Elbit Systems did not respond to a request for comment.

RI previously reported that Nordea Asset Management has removed Elbit from its exclusion list and invested €1.8 million in company shares via conventional or Article 6 funds, following a revised assessment by its data vendor ISS ESG.