While defence companies are screened out of some investment portfolios on ethical and other grounds, the war in Ukraine has led to an expectation of higher government spending in the sector and thus surging stock prices for the likes of Lockheed Martin, Leonardo and others.
Despite their responsible investment policies, some large pension funds in the Nordic region confirmed to IPE that they are free to invest in the sector – aside from certain controversial weapons and nuclear arms.
There are signs the defence sector is being seen as more acceptable from an ethical perspective since Russia’s invasion of Ukraine underlined the need for countries to defend themselves militarily.
Swedish banking group SEB announced on 3 March that its fund company, SEB Investment Management, had updated its sustainability policy on investments in the defence industry, and would now allow a number of funds to invest in the sector.
Analysts at Citi reportedly wrote in a recent note that defence was “likely to be increasingly seen as a necessity that facilitates ESG as an enterprise as well as maintaining peace stability and other social goods”.
At Sampension in Denmark, Henrik Olejasz Larsen, chief investment officer, told IPE that before the current war, his firm was already allowed to invest in defence stocks – only excluding production of weapons that are in conflict with UN resolutions.
“And we see it as logical that institutional investors invest in companies whose production is necessary for a national defence,” he said.
Magdalena Högberg, head of strategic allocation and quantitative analysis at AP4 in Stockholm, said the national pensions buffer fund divested from companies manufacturing or selling controversial weapons such as anti-personnel mines or cluster bombs, as well as companies involved in the manufacturing of nuclear weapons.
“Investing in other companies in the defence segment is however within our investment guidelines,” she said.
“While we agree that the defence sector is highly likely to benefit from increased spending as a consequence of the shift in security policy, the parts of the defence sector we have divested from manufacture weapons associated with great human suffering – we do not foresee any change in how we view those activities,” Högberg said.
As an example of increased government spending on defence following the outbreak of war in Ukraine, Germany has recently pledged to spend €100bn on upgrading its military.
Since Russia invaded Ukraine on 24 February, shares in US defence firm Lockheed Martin rose from $388.71 to a peak of $463.91 on 7 March, before falling back somewhat to around $440 now. Share in Italian aerospace and defence firm Leonardo, meanwhile, have made a more spectacular gain, rising from €6.36 to stand at €9.13 currently.
Guidelines for Norwegian municipal pension provider KLP state that as a responsible investor, companies associated with gross or systematic violations of international norms must be excluded from its portfolios and those of the KLP funds, according to Harald Koch-Hagen, KLP’s senior vice president risk management and allocation.
“This means that we exclude investments in companies that produce weapons or parts of weapons whose designed use is in breach of fundamental humanitarian principles, including production of parts for nuclear weapons,” he said.
“Defence companies who do not produce such weapons or parts, are not excluded, and we do have investments in defence companies,” he told IPE.
However, the firm’s capital management subsidiary KLP Kapitalforvaltning also manages equity funds certified with the Norwegian Swan Ecolabel, he said, which exclude all kinds of weapon producers.
“For KLP, fundamental humanitarian principles will remain a governing guideline for any potential investments in defence companies,” Koch-Hagen said.
A spokesman for Alecta, Sweden’s biggest pension fund, said the SEK1.23trn (€11.8bn) provider is permitted to invest in defence stocks as long as those companies do not develop, produce, maintain or distribute components or systems specifically developed for controversial weapons.
Asked whether the defence sector would become more acceptable to institutional investors given the war in Ukraine, Veritas CIO Kari Vatanen said the current situation underlined the fact that blacklists were not a good tool for ESG.
“Blacklists rely on black-and-white thinking that some companies or sectors are completely bad even if their products are needed,” he told IPE.
“Classification is typically based on some ethical norms in some cultural context and that can change radically over time when either new information or new cultural aspects are found,” Vatanen said.
For example, he said, nuclear power was thought to be harmful for the environment 20 years ago, but was now treated as an environmentally-friendly transition energy on the way to the non-fossil-fuel economy.
“Similarly, we don’t know if sugar or fast food will be on the blacklist in next five to 10 years,” he said.
Rather than blacklists, Vatanen said that for Veritas, ESG meant setting objectives and measuring the development and engagement with companies.
Yesterday, IPE reported the views of the same panel of Nordic pensions investment chiefs on the prospects for a tightening of the ECB’s monetary policy.
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