ESG investors are pushing back against suggestions that defence stocks should be reclassified as sustainable following Russia’s invasion of Ukraine.
Since the outbreak of war in February, defence companies and associations have argued that the rising threat to European security and democracy justifies their inclusion in ESG and sustainable investment strategies.
The German defence association (BDSV) has even suggested that defence should be included in the EU’s proposed social taxonomy as a “sustainable economic activity”. Challenged on this position at its AGM, defence giant ThyssenKrupp said the association’s reasoning was that “without security there is no sustainability” (Ohne Sicherheit gibt es keine Nachhaltigkeit).
ESG investors are unconvinced. Amanda Young, chief sustainability officer at abrdn, told Responsible Investor that weapons could not be suitable for sustainable funds “until there are clear inabilities for weapons to be transferred to less democratic states”.
At Germany’s Bank für Kirche und Caritas, which put the question to ThyssenKrupp, head of sustainability research Tommy Pietmonte is unequivocal. “Sustainability investors cannot invest in weapons companies. Defence cannot be sustainable, there is no discussion.”
Gunnela Hahn, head of sustainable investment and governance at the Church of Sweden, says that, while promised increases in defence spending mean there could be a financial case for investors to take another look at the sector, there is no need to conflate this with ESG.
“It’s two separate conversations,” she says. “One is to invest in companies that work hard to create sustainable value for society by treating people and the planet with dignity and respect, ensuring good ESG practices throughout the value chain. The other conversation is limited to how we protect our borders and territory from military attacks.”
“Not everything needed in society can be sustainable if the word sustainable should keep having a meaning”
Church of Sweden
Hahn suggests an analogy with a fire extinguisher in a house. “It doesn’t make the house a green building, but it is indispensable in case of a fire. It could even have many negative effects on health and water, but we simply need it.”
She adds: “Just bear in mind that military defence doesn’t protect us from cyberattacks, pandemics or climate change. Not everything needed in society can be sustainable if the word sustainable should keep having a meaning.”
Some have argued that the defence sector’s enthusiasm for sustainable status offers an opportunity to increase engagement. The chief executive of Newton Investment Management, Euan Munro, recently said it was important to ensure the sector was being “overseen by people who care”.
The stewardship arm of Federated Hermes EOS has a track record of engaging with the sector on health and safety, climate change and human capital management.
A spokesperson told Responsible Investor: “Federated Hermes EOS do not seek to stop companies being in the business of defence weapons. They do, however, ask for the adoption of human rights policies that meet international standards and so avoid sales to regimes that would carry out human rights abuses. However, it can in practice be difficult to define these and infeasible to ask a company to not sell weapons to a state which it is authorised to sell to via its national government.”
Alliance Bernstein told Responsible Investor that by engaging with aerospace and defence companies, their ESG-integrated funds can encourage best practices. “By maintaining ongoing conversations with companies’ senior management, and implementing our proxy voting policy, AB can push the industry to improve their ESG capabilities,” a spokesperson said. However, they added that Alliance Bernstein’s sustainable strategies generally take an exclusionary approach to the industry.
Bank für Kirche und Caritas has also engaged with Thyssenkrupp and fellow German defence company Rheinmetall, although from a perspective of “shareholder criticism”. Piemonte told Responsible Investor: “We don’t say to the weapons companies to not produce arms anymore, because that won’t happen. What we would like to see is that they’ve implemented a due diligence process that goes beyond state export licences.”
‘Human rights concerns’
He added that the current export practice “to countries ruled by autocrats where human rights are violated” is a source of concern “not only for ethical reasons but also for the reputation and may become a source of financial risks for the company”, due to possible lawsuits and revoking of weapons export licences. “In consequence of all these reasons we would like to see a stop of weapons exports to countries with human rights concerns,” Piemonte told Responsible Investor.
Bank für Kirche und Caritas bank is trying to get Norges Bank Investment Management (NBIM) to support the engagement with Rheinmetall. NBIM declined to comment.