Can investing in armaments within ESG, sustainable & ethical fund options ever be justified?

by | Sep 23, 2022

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Julia Dreblow, Founding Director at SRI Services and an ethical investing expert, shares her thinking on whether Russia’s invasion of Ukraine could shift perspective and mandates around the eligibility of including investment in armaments or defence companies within sustainable/ESG funds.

A Sunday Times article published at the end of July caught my eye with its heading “Ethical fund managers should look again at our defence stocks, says BAE”. *

Aside from the obvious thought that ‘he would say that, wouldn’t he’ – as companies don’t tend to like being excluded from buy lists – the tone and some of the content felt like it needed further exploration.


Although there are no hard and fast rules in ESG, sustainable, responsible and ethical investment – because opinions vary – the idea that ethical funds might invest in defence stocks like BAE is pretty farfetched. I am very confident that they won’t.

The fact the author dwelled on BAE’s recent share performance was also slightly odd. Performance matters of course, but criticising funds for not holding companies that they explicitly avoid – particularly at a time when so many people are worried about ‘greenwash’ – is not helpful.

This is, however, an important topic. Whilst I do not normally like to comment on ‘personal values’ related issues in detail – as I respect people’s right to have different views – what is happening in Ukraine matters.


A new paradigm?

So here are some thoughts on what I think might – and might not – happen:

First and foremost, I must make it clear that like most people I am utterly appalled by what is happening in Ukraine. Russia’s actions are horrendous and endlessly shocking, which is why they have rightly focused minds.

Defence is now seen as being more important than it has been for a long while and thinking through how to respond is incredibly important.


However, history tells us why armaments – or ‘defence’ if you prefer – companies won’t be bought by ‘ethical’ funds any time soon.

Don’t look back in anger

The earliest ethical funds, notably the UK’s Stewardship funds (now effectively split between Aviva and Columbia Threadneedle) and the first US ethical fund (Pax), now part of Impax – both have opposition to armaments companies at their core.

The Stewardship funds were borne of Quaker and Methodist teachings – where there is absolute opposition to all things military. And the Pax fund was created by and for people who opposed the Vietnam War. Funds of this kind have been sold to likeminded clients for many decades.


Changing strategies for funds such as these would require contacting all clients to offer free fund switches (which implies cost) – or offering easy exit strategies (resulting in a reduction in AUM). Alternatives would involve potential compliance risks and accusations of mis-selling (implying reputational risks).

Of course, some clients care more about military exclusions than others. Opinions vary. And some may focus on the types of weapons that are made – or who they are sold to. But as a matter of principle, we cannot hope to be trusted as an industry if investments funds say one thing and then do something else. Particularly when it comes to deeply personal issues like this. So, any shift would have to involve a fund’s clients and the options they are offered would have to be genuine.

A duty to inform

From an intermediary’s perspective, changes of this kind can swiftly become a nightmare. Unless they are particularly ‘brave’ they would have to review the suitability of the funds for all relevant advised clients – which could rapidly become very time consuming.


Indeed, changes such as this have been tried in the past and they are notoriously difficult to manage. Funds can change managers over the years and house views do shift, but being sure an entire suite of clients’ are on board with a proposed change is tough.

However, not all funds lead on ‘ethical issues’ like the avoidance of armaments companies. Other related strategies, such as funds that focus on ‘ESG’, may find this less problematic. The basics remain. If a fund has been sold to clients on the basis that it avoids, for example any involvement in the armaments industry, that is what it must do (or consult clients…). However, if armaments-related exclusions were not a major part of a fund’s strategy, perhaps if the fund’s only explicit exclusions related to land mines, cluster munitions or white phosphorus, as some do, there may be room to manoeuvre.

The variation we see today may be in part to do with timing. The origins of ESG go back only a couple of decades, when arms-related concerns were generally lower. (The term ‘ESG’ grew out of the a Acronym ‘ESE’ – or ‘SEE’ – dropping the second ‘E’ – which was for ‘ethical’ and seen as ‘niche’ at the time – replacing it with G – for ‘governance’.)


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