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Viewpoints

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ESG investment in aerospace and defence

A number of ESG funds now view investing in defence as compatible with a sustainable strategy. Public perception has been key to this change: the war in Ukraine has focused discussions on how “defence” could be sustainable, and many investors have seemingly now “bought into the argument from governments that backing arms makers, long the subject of boycotts and student protests, should carry positive social connotations rather than exclusively downside risk”. There is increased understanding of how national security can interact with ESG policy worldwide, and although the value of ESG funds’ defence holdings still make up only approximately 1% of the total EUR1.5tn held, Morningstar Direct reports that approximately EUR7.7bn is now invested in the defence sector (up from EUR3.2bn in 2022).

But investing in defence will be an ongoing balancing act for ESG funds. Despite arms companies’ soaring share prices, a historic nervousness stemming from the link of defence companies to harm to life (alongside the tobacco and mining industries) may persist for ESG investors. Similarly, popular protests and social boycotts can be unpredictable and impact future investment. Narrowly applied ESG metrics (including defence-specific measures) may also exclude some defence investments from eligibility as a “sustainable” option; as we noted in our recent review of the ESG ratings landscape, it remains to be seen how new ESG legislation will impact the defining parameters of this complex sector.

Morningstar’s analysis also shows the number of European ESG funds holding more than 5 per cent in aerospace and defence companies tripled, going from 22 to 66 in the past two years.

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sustainability and esg