Calls for ESG Investors to Embrace the Defence Sector
Prominent politicians and military figures have reiterated their appeals for additional City investors to support the defence sector amidst the ongoing conflict between Israel and Hamas.
Challenging Perceptions: The Defence Industry’s Importance
Ministers have previously cautioned that environmental, social, and governance (ESG) investors who avoid defence firms are endangering the long-term security of the United Kingdom.
The City’s support for ESG funds investing in defence businesses grew when Russia invaded Ukraine.
It gained momentum following the Israeli response to Hamas’s assault, which involved retaliatory airstrikes.
ESG investors have historically shied away from investing in defence firms, perceiving them as purveyors of destructive weaponry.
However, some who say the business is essential for protecting democracy globally are getting uncomfortable with this view.
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Former First Sea Lord Admiral Lord West stated, “Defence firms are indispensable and collaborate closely with our military to ensure that we can effectively combat and prevail over our adversaries.
“That appears to be an extremely worthwhile endeavour that the City should support rather than penalise.”
City Minister Andrew Griffith stated that excluding defence enterprises solely on the basis of ESG factors is “misguided.”
He added that the international crises in Ukraine and Israel-Palestine show that the defence sector is “more vital than ever.”
Investing in companies that manufacture weapons capable of causing indiscriminate harm to civilians. Such as cluster munitions, is generally prohibited by ESG investing regulations.
Brad Greve, the finance director at BAE Systems, stated, “Since conflict continues to exist in our world, a robust defence is necessary to safeguard a free society.” Rather than penalising the defence industry, investors ought to support it.
“Funds should be permitted to have their own rules, but a blanket exclusion approach prevents a productive dialogue on the positive role defence plays,” he continued.
The London Stock Exchange Group reports that UK investment managers have cut their stakes in BAE by 9% since 2022. This has prompted Westminster to express concern regarding the sector’s dearth of backing from British investors.
The defence industry is ‘honourable’ and should be included in ESG criteria, according to Jos Sclater, chief executive officer of London-listed Avon Protection, which manufactures gas masks and bulletproof helmets for soldiers.
The Value Surge: Potential Returns for ESG Funds
Russia invaded Ukraine in February 2022, boosting the London Stock Exchange’s leading armaments companies by £25 billion.
In the same period, the value of BAE Systems, which is currently valued at £32.5 billion, has increased by £6.5 billion, whereas Rolls-Royce has reached £18 billion, a £12.9 billion increase.
The value of additional companies, such as QinetiQ, Chemring, and Babcock, has also increased. Some of these gains may be due to strategy adjustments, but they imply ESG funds outperformed by investing in defence.
