For many years, and with the gradual rise of ESG investing, investors have been excluding the defence sector from their investments due to the adverse nature of armaments which have often served to infringe human rights and led to devastating effects on human lives and the overall well-being of society.
In light of the war Putin has raged against Ukraine threatening stability in Europe, we have witnessed the Aerospace and Defence industry together with certain financial players (re)ignite a debate on sustainable investment in the defence sector. The central question around this debate includes the means necessary to preserve peace, protect territorial integrity and achieve military resilience in Europe/Ukraine in the face of conflict without a strong defence industry. Some investors might be tempted to respond that private financing of the defence sector has a role to play in establishing such military capacity and resilience. Perhaps some of them are also motivated by a fear of losing out on economic opportunities, following some European countries’ decision to support arms exports to Ukraine and even significantly build-up their own military capabilities (Germany).
In any case, our opinion is that the reinforcement of a country’s or a supranational entity’s military infrastructure or the manner in which it responds to potential military threats should not be up to investors to decide, certainly not sustainable investors. In fact, while we are deeply concerned about the war, we find the case for investing sustainably in the defence sector an incredibly difficult one to make. At Candriam, this is a position we have held with strong conviction since we started on our sustainable investing journey in 1996. The current conflict does not shake our conviction and we do not feel it should lead us to paddle back on our exclusion policy.
Yes, war is terrible and is facilitated by tools and weapons that impact millions of people and families daily. Supporting companies that produce and/or help supply weapons, even to protect communities on the receiving end of the attacks, should not be an easy decision to make for any investor with strong-rooted sustainability values. The defence industry is extremely complex, with many considerations to take into account. For example, how can investors make sure that the very companies or equipment that helps protect the vulnerable nations today will not also help power the attacker tomorrow? As an investor, due to national security concerns, it is at times difficult to obtain granularity on key information from weapons companies including holistic lists of end-clients to ensure that investments are not supporting oppressive and authoritarian regimes which inflict harm to their own citizens. In that regard, exposure to those companies could be considered a violation of the UN principles on the protection of human rights, a widely accepted governance standard for sustainable investing and supported by Candriam’s sustainable investment principles.
Further complicating the matter, when assessing weapon companies for investment, it is essential to distinguish between conventional and controversial weapons as the latter have been banned by several international treaties due to their non-discriminatory harmful impacts on civilian populations. Although this may seem like a straightforward exercise, even sustainability-focus investors such as Candriam and specialised data providers encounter difficulties in determining true involvement versus a “high probability” of involvement. All these factors united represent significantly high risks that in our view are unacceptable in ESG funds.
Sustainable investing is a cornerstone of the founding principles of the European Union’s Sustainable Finance Action Plan. Shortly after its publication of the EU Environmental Taxonomy, Europe started on its definition of a Social Taxonomy to establish a common framework with which to evaluate what economic activities contribute positively to society when it relates to decent work, adequate living standards and inclusive societies, while doing no significant harm to other sustainable objectives. In proposals submitted in 2021, the defence industry was put in the same bucket as tobacco and gambling companies. The suggestion was to label these industries as “harmful” and not sustainable. Who would have thought that only a few months later, some voices would suggest that defence could potentially be considered aligned with the EU Taxonomy’s objectives of making a strong ESG contribution or not doing any harm? In our view, technology is not neutral in this regard and the do-not-significantly-harm and minimum safeguards requirements alone would be difficult for defence companies and weapons companies in particular to meet considering the indiscriminate impact and undue harm caused.
Yes, of course sustainable and responsible investing should be nuanced. However, when referring to pure ESG strategies, to what extent will we twist the narrative to fit different arguments and perspectives on what is considered sustainable or not? Isn’t the purpose of the Taxonomy to be a scientific (and non-political) consensus based on sound moral and logical judgement that gives appropriate considerations to all impacts of our investment activities?
A world without war is an unrealistic and utopian vision. Defence is a means for governments to maintain peace, territorial stability and integrity. However, at Candriam, we believe that this is all beyond the remit of sustainable investors’ responsibilities and is a debate to be had within and between democratically elected governments. Investors cannot solve the issue of weapons and defence as private capital cannot decide on behalf of nations. From our point of view, we have a fiduciary responsibility to invest on behalf of our clients in the most sustainable manner. Our clients trust us for our convictions and our ability to invest in a truly sustainable fashion, without wavering from the principles of sustainability due to global political events.
National boundaries and politics should not be confused with our role as sustainable investors.