The end of the war on defense: pressure on ESG funds to support the sector
Prominent military figures and politicians have made fresh calls for more City investors to back the defense industry as the conflict between Israel and Hamas intensifies.
Ministers have previously warned that Britain’s long-term security is being put at risk by environmental, social and governance (ESG) investors shunning defense companies.
The case for ESG funds investing in defense companies gained momentum in the City following the Russian invasion of Ukraine.
It gained more strength after Hamas attacked Israel, which launched retaliatory airstrikes.
Defense companies have traditionally been boycotted by ESG investors who have viewed them as traders in destructive weaponry.
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However, this view is increasingly questioned by those who believe the industry is vital to protecting democracy around the world.
Admiral Lord West, former First Sea Lord, said: ‘Defence companies are vitally important and work hand in hand with our military so we can fight and win against our enemies.
“I think it’s a very worthwhile effort and something that should be encouraged rather than penalized in the city.”
City Minister Andrew Griffith said it is “a mistake” to exclude defense companies solely on ESG grounds.
He added that the recent conflict between Israel and Palestine, as well as the war in Ukraine, show that the defense industry is “more important than ever.”
ESG investment rules generally prohibit investing money in companies that produce weapons such as cluster bombs that can cause indiscriminate harm to civilians.
Brad Greve, chief financial officer at BAE Systems, said: “Conflict remains a part of our world and hence the need for a strong defense to protect a free society. Investors should encourage, rather than punish, the security industry. defending”.
He added: “Funds should be allowed to have their own rules, but a blanket exclusionary approach prevents a constructive conversation about the positive role defense plays.”
UK-based fund managers have reduced their holdings in companies such as BAE by an average of 9 percent since the beginning of 2022, according to data from the London Stock Exchange Group. This has raised concerns in Westminster that the sector lacks support among British investors.
Jos Sclater, chief executive of London-listed Avon Protection, which makes bulletproof helmets and gas masks to protect soldiers, said the defense industry is “honourable” and should be included in ESG criteria.
The value of major defense companies listed on the London Stock Exchange has soared by almost £25bn since the Russian invasion of Ukraine in February 2022.
BAE Systems, worth £32.5bn, has added £6.5bn to its value in that time, while Rolls-Royce has soared by £12.9bn to £18bn.
Other companies, including QinetiQ, Chemring and Babcock, have also increased in value. Some of these gains are due to strategy changes, but they show that ESG funds could have achieved better returns by investing in defense.