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Können Waffen nachhaltig sein?: Ukraine Krieg als Gratwanderung für Investoren

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Können Waffen nachhaltig sein?

  •  Russia’s war of aggression prompts questions about the sustainability of conventional weapons and their manufacturers
  • A prime example of a borderline case in ESG investing
  • Union Investment upholds its view that weapons are necessary, but not sustainable

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“Security is the mother of sustainability” – at least, that is the challenge that the German Security and Defence Industry (SDI) association puts to ESG investors and others.¹ Can weapons be sustainable? The debate about this issue has heated up significantly since the start of the war in Ukraine, especially in Germany and Europe. Most, apart from strict pacifists, broadly agree that weapons can certainly be necessary to protect peace, freedom and democracy.² The reawakening of this realisation has recently prompted a pronounced shift in German security policy. So why should something that is used to protect these values and to achieve other sustainable development goals not be considered sustainable?

The debate that has flared up about weapons is highly relevant to the financial industry, including asset managers. After all, the mantra – especially for sustainability-oriented investors and the design of ESG investment strategies – has so far largely been that weapons and arms manufacturers are taboo. The above quote from the SDI suggests that companies in this sector have started to feel the effect of sustainability filters. If you do not qualify as ‘sustainable’, it is more difficult to access funding.

Is it time for the financial industry to reassess its approach in light of events in eastern Europe? Are current sustainability criteria too strict? Is it inconsistent to declare recognised, purely defensive necessities of security policy incompatible with sustainability principles? Or, to put it bluntly: Should sustainable investors not be willing to contribute to the build-up of defence capabilities in order to strengthen the resilience of our democracies?³  

¹ See also the full article of the SDI.
² These sustainability objectives are, for example, covered by the 17 sustainable development goals (SDGs) of the United Nations (more specifically in SDG 3 and SDG 16).
³ According to a recent study by investment consultancy bfinance from April 2022, 39 per cent of the institutional investors surveyed stated that the war in Ukraine had prompted them to adjust and/or review relevant ESG processes.

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Generally, investment products and investment strategies can be split into two categories (not just at Union Investment) for the purposes of the current debate:

Conventional investment strategies and funds have always been permitted to invest in armaments companies if these were considered promising from a fundamental perspective. This is also true for Union Investment’s funds, subject to the proviso that the companies do not produce outlawed, nuclear, biological or chemical weapons. A large proportion of asset managers are therefore generally able and, indeed, willing to invest in the defence industry.

Dedicated sustainability strategies, on the other hand, often exclude arms manufacturers from the investable universe in line with their specific investment policies and ESG requirements. This is based on several considerations:
  • The use of conventional weapons also causes human fatalities, severe injury and suffering as well as substantial property damage and sometimes total destruction.
  • Conventional weapons can be used to restrict civil rights and liberties, to exploit people and to make the world less safe.
These arguments form the basis of Union Investment’s rationale for prohibiting direct investment in arms manufacturers under sustainable investment strategies. Ultimately, weapons cannot be clearly categorised as ‘good’ and ‘evil’ or ‘offensive’ and ‘defensive’. They cannot be monitored or evaluated over the long term to determine exactly how they are being used and their use always comes with a risk of collateral damage. In a nutshell: There will ultimately always be an irresolvable conflict between the nature of weapons, regardless of what type they are or who uses them, and the fundamental meaning of sustainability. In addition, many arms manufacturers have been involved in controversies and are excluded from the eligible universe of sustainable investment strategies on those grounds. Whether through companies’ deliberate actions or their willingness to turn a blind eye, large volumes of weapons find their way into the hands of people who do not use them in a purely defensive manner on behalf of democratic states.

This is why the core principles of responsible investing cannot be framed around a specific scenario such as the war in Ukraine, no matter how clear the roles of aggressor and victim may be in this case. An adjustment of these principles and the underlying assessment methodology would be inconsistent and lacking in clarity. We regard weapons as necessary, but not sustainable.

Critics may say that this sounds like wanting to have it both ways. After all, many European countries – including Germany – have recognised the need to increase their defence spending. And Union Investment will participate in this process, including through sustainable investments, but crucially by indirect means through purchases of government bonds⁴. The logic is that in a democratic society, the elected government holds the monopoly of power. Purchasing government bonds thus helps to facilitate necessary defence spending. Funding (exclusively) free and democratic states (by systematically pre-validated methods) also helps to promote the objectives of SDG 3 (good health and well-being) and SDG 16 (peace, justice and strong institutions).

We can therefore conclude that conventional investment strategies will indeed do the heavy lifting when it comes to ensuring that our democracies are well defended. But ESG investment strategies do not fundamentally pose any obstacle to this.

⁴ For example, purchases of German government bonds will go towards fiscal projects like the German government’s ‘special fund for the Bundeswehr’ that was recently launched with a volume of €100 billion.
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So there is no need to bow to pressure from lobby groups, company representatives and politicians who argue along the lines of the SDI statement quoted above. Nor is there any evidence so far that the growing importance of sustainable investment strategies poses a threat to the international arms industry, especially when it comes to the defence spending of democratic governments. Examples such as Lockheed Martin, Raytheon and Northrop Grumman from the US as well as European companies such as BAE Systems and Thales prove that companies from this sector can survive and thrive in the capital market, in times of war and peace.⁵ In some specific cases, especially among unlisted SMEs, funding conditions can become tough. But, as explained, this cannot justify a reclassification of armaments and arms manufacturers as sustainable investments.

⁵ The international companies listed here are, however, excluded from the investable universe of the entire Union Investment Group due to their business activities in the field of nuclear weapons. By contrast, German arms manufacturers such as Rheinmetall and MTU Aero are eligible for investment through conventional UI fund products.

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The argument that the consistent application of a sustainability strategy may result in a small disadvantage in terms of returns does not hold water either. It is now widely accepted that sustainable investment does not adversely affect performance. From a short-term perspective, things may look different in specific scenarios such as the current superior performance of the arms industry. But the most valuable asset of a sustainability-oriented asset manager is their credibility. Risking that for a temporary, opportunistic hunt for returns in the capital markets would be the epitome of unsustainable behaviour.
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Sustainable investing is often a balancing act. The question of how to deal with the arms industry is just one example of a grey area in the investment business. There are plenty of objectives that compete with one another, cannot be achieved simultaneously or – seemingly or actually – contradict one another. The only way to operate in a credible and consistent manner in this field over the long term is to follow clear principles that are not adapted to fit specific situations – not even when they are as dramatic as the current war in Ukraine. Those who walk a fine line are likely to attract criticism in a liberal society, especially in economies where lobby groups have a strong voice. But, frankly speaking, ESG investors are (and have to be) able to take that in their stride.

When it comes to investing in weapons and arms companies, Union Investment recognises as an asset manager that this is necessary, but we stay firm in our belief that it is not sustainable. For sustainable investment decisions, we continue to apply the fundamental principle that the damage and suffering that can be caused by weapons makes shares in arms manufacturers ineligible for direct investment from an ESG perspective.

However, ESG strategies are not fundamentally incompatible with the idea that democracies need to strengthen their defences. By purchasing selected government bonds, sustainable investors can indirectly facilitate government spending on defence.
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