European asset managers are revisiting their investment strategies concerning the defense sector, driven by pressures from both clients and political figures who suggest easing current restrictions to support Europe’s efforts to re-arm.
Under the European Union’s current regulations, funds labeled as sustainable are required to ensure their investments ‘Do No Significant Harm’. Consequently, many asset managers have avoided the defense sector entirely, with companies like Rolls Royce and Airbus, despite their substantial commercial aviation presence, deemed off-limits.
The European Union is now seeking approximately 800 billion euros in investment to strengthen its defense capabilities, a move spurred by calls from former U.S. President Donald Trump for Europe to bolster its security responsibilities. This has rendered the sector crucial, prompting asset managers like Britain’s Legal & General to reconsider their positions, as geopolitical tensions elevate the sector’s appeal.
Some of Europe’s largest fund groups are reportedly reviewing their stance on defense investment at the board level, though revising sustainability policies to include arms manufacturers is fraught with complexity and controversy. UBS Asset Management and Mercer have confirmed they are re-evaluating their exclusions, a sentiment echoed by other major firms.
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While certain exclusions remain for controversial weapons under international treaties, EU and UK regulations do not explicitly prohibit investments in most defense companies. However, a strong focus on environmental, social, and governance (ESG) concerns has historically deterred large asset managers from engaging with the sector, similar to stances against tobacco investments.
Recent political discussions have intensified the debate, with British leaders urging investment in the military sector and France considering lifting ESG-related restrictions on defense loans. In Norway, calls to possibly revise ethical investing standards have emerged, reflecting a shifting landscape.
Despite this momentum, hesitation persists among some fund managers. Lloyd McAllister of Carmignac argues that sustainable funds are unfairly blamed for stalling defense investments, noting that traditional funds still hold substantial assets in these areas. However, recent data indicates a slight increase in ESG fund holdings within aerospace and defense sectors.
Amidst these discussions, investors are seizing opportunities. WisdomTree, for instance, has launched a European defense exchange-traded fund, while predictions suggest Danish pension groups may soon relax bans on defense investment.
As geopolitical pressures mount, the defense sector’s appeal among European asset managers is growing, prompting strategic reassessments. While challenges remain, including ethical considerations and regulatory complexities, the sector’s importance in ensuring regional security makes its investment hard to ignore. This evolving landscape suggests a gradual shift toward integrating defense into the broader investment strategy.
