Are firearms considered eco-friendly or sustainable?
The Russian invasion of Ukraine has shifted public perception towards the arms industry in Germany, making it more positively viewed. It's possible that soon, investing in weapons manufacturers could be considered sustainable in Germany as well, because German financial associations plan to allow sustainable investment products to invest in arms companies.
People who invest in funds focusing on sustainability might unwittingly fund weapon producers in the future, due to changes in the rules set by German banking and fund associations. The change in policy is driven by political developments and new regulations, as per the German Banking Industry Committee (DK). Any weapons prohibited by international law will still be excluded from investments. The relevant regulatory bodies must approve the plans before they can be implemented. Abandoning the "no" to the defense industry, also known as the minimum exclusion, is "an important step towards EU-wide standardization of the minimum requirements for sustainable funds," as stated by the German Fund Association BVI.
The European Securities and Markets Authority (ESMA) now permits arms manufacturers to be classified as sustainable, excluding those producing illegal weapons like antipersonnel mines and cluster munitions. "Since the invasion of Ukraine, there has been a debate about the social significance of defense and armaments. We aim to facilitate this discussion for fund managers and investors," said Magdalena Kuper from BVI in an interview with ntv.
In the future, fund managers will have the autonomy to decide whether to incorporate arms manufacturers in their sustainability funds or not. Those in favor of the defense industry argue that it contributes to peace and security. Opponents hold a different view.
"Arms cannot be sustainable"
Union Investment has declared its intentions to avoid weapons investments in relevant products. "Arms are necessary, but they cannot be deemed sustainable," said Union Investment fund manager Henrik Pontzen in an interview with ntv. Anything can only be sustainable if it doesn't entail significant negative side effects. However, these are prevalent with weapons - "they result in civilian and military casualties."
Security should not be conflated with sustainability, said Verena Menne, CEO of the Forum for Sustainable Investments, in an interview with ntv. "Just because something is necessary and therefore must be financed, does not make it sustainable." Of course, a country has the right to defend itself with weapons in case of an attack.
Since the Russian invasion of Ukraine, the investment volume of European sustainable investment funds in arms stocks has more than doubled. According to the "Financial Times," citing analysis firm Morningstar, around a third of the ESG funds in Europe and the UK have now invested €7.7 billion in this sector. In the first quarter of 2022, it was only €3.2 billion. ESG stands for environmental, social, and responsible corporate governance.
The Morningstar analysis also reveals that the number of European ESG funds holding more than 5% in aerospace and defense companies has tripled over the last two years, increasing from 22 to 66. Given the significant price gains on the stock exchange, this increase is not surprising - the "Stoxx Total Market Aerospace & Defence" index has risen by over 80% since the beginning of 2022.
Investors will likely need to be more vigilant about which companies their sustainability funds invest in. Each fund publishes its investment guidelines, as mentioned by Hermann-Josef Tenhagen, the editor-in-chief of "Finanztip" in an interview with ntv. This allows investors to check if the investments align with their personal standards.
After the Russian invasion of Ukraine, the German banking and fund associations are considering changing their rules to allow investments in arms companies for sustainable funds. This shift in policy could potentially lead investors unknowingly funding weapon producers.
Despite the increase in investment volume in arms stocks by European sustainable investment funds, some organizations like Union Investment still advocate against investing in weapons due to their negative side effects, such as civilian and military casualties.
