The German fund industry association BVI, the German Structured Securities Association (Bundesverband für strukturierte Wertpapiere, BSW), and the German Banking Industry Committee (Die Deutsche Kreditwirtschaft) have put forward a new concept to unlock investments in the defence industry according to ESG standards.
The move follows the publication of European Securities and Markets Authority’s (ESMA) guidance on fund names, the trio stated.
The associations have drafted a plan for a so-called ESG target market concept (Zielmarkt Konzept) to assess under which conditions investors can allocate capital in the defence industry.
According to the new concept, investors can allocate capital through funds, credit and other financial products, in companies generating more that 10% of revenues from the defence sector, without violating ESG standards.
So far, investments have been limited to companies generating a maximum of 10% in revenue from the production of armaments.
The trio started to develop the ESG target market concept back in 2021, before the war in Ukraine began and in the absence of European Union and German standards for sustainable products.
The version of the concept drafted in 2021 contained, as a minimum standard for the German market, standards to make it easier marketing sustainability products to clients.
Meanwhile, ESMA published its guidelines for sustainability-related additions in fund names in May, with new minimum standards.
According to the guidelines, exclusion criteria of the Climate Transition Benchmark refer to companies involved in any activities related to controversial weapons, but not for the defence industry in general, triggering the review by the German associations of their original ESG concept.
The clarifications of the European Commission also provided new insights, for example on the affinity between investments in the defence industry and the EU Taxonomy.
Weapons banned under international law should continue to be completely excluded from investments, according to the concept drafted by the associations.
The financial supervisory authority, BaFin, and the Federal Cartel Office (Bundeskartellamt) have yet to approve the concept.
The ESG target market concept is an important step towards the EU-wide standardisation of the minimum requirements for sustainable funds, a BVI spokesperson said.
German investors have shown reluctance to invest in a booming defence industry, facing a dilemma when confronted with ESG criteria.
Questions remain on whether asset managers and banks will adjust their products to new standards for ESG investments in the defence industry, which is still viewed with scepticism by their clients.
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