While defense companies are excluded from some investment portfolios for ethical and other reasons, the war in Ukraine has led to expectations of increased government spending in the sector and therefore a spike in share prices for Lockheed Martin, Leonardo and others.
Despite their responsible investment policies, some large pension funds in the Nordic region have confirmed to IPE that they are free to invest in the sector – with the exception of some controversial weapons and nuclear weapons.
There are signs that the defense sector is seen as more ethically acceptable since Russia’s invasion of Ukraine underscored the need for countries to defend themselves militarily.
Swedish banking group SEB announced on March 3 that its fund company, SEB Investment Management, had updated its sustainability policy on defense industry investments and would now allow a number of funds to invest in the area.
Citi analysts reportedly wrote in a recent note that defense was “likely to be increasingly seen as a necessity that facilitates ESG as a business as well as maintaining peace and stability.” other social goods”.
At Sampension in Denmark, Investment Director Henrik Olejasz Larsen told IPE that before the current war his company was already allowed to invest in defense stocks – excluding only the production of weapons which are in conflict with UN resolutions.
“And we consider it logical for institutional investors to invest in companies whose production is necessary for national defence,” he said.
Magdalena Högberg, head of strategic allocation and quantitative analysis at AP4 in Stockholm, said the national pension reserve fund is divesting itself of companies making or selling controversial weapons such as landmines or bombs. fragmentation, as well as companies involved in the manufacture of nuclear weapons. .
“Investing in other companies in the defense segment is within our investment guidelines, however,” she said.
“While we agree that the defense sector will most likely benefit from increased spending due to the change in security policy, the parts of the defense sector that we have divested from manufacturing of weapons associated with great human suffering – we do not foresee any change in the way we perceive these activities,” Högberg said.
As an example of increased public defense spending following the outbreak of war in Ukraine, Germany recently pledged to spend €100 billion to modernize its military.
Since Russia invaded Ukraine on February 24, shares of US defense firm Lockheed Martin have risen from $388.71 to a high of $463.91 on March 7, before falling back somewhat to around 440. dollars today. Share of Italian aerospace and defense firm Leonardo, meanwhile, made a more dramatic gain, rising from €6.36 to €9.13 currently.
According to Harald Koch-Hagen, senior vice president of risk management at KLP, the guidelines of Norwegian municipal pension provider KLP state that as a responsible investor, companies associated with gross or systematic violations of international standards should be excluded from its portfolios and those of the KLP funds. and attribution.
“This means that we exclude investments in companies that produce weapons or parts of weapons whose intended use is contrary to fundamental humanitarian principles, including the production of parts for nuclear weapons,” he said. .
“Defense companies that do not produce such weapons or parts are not excluded, and we have investments in defense companies,” he told IPE.
However, the company’s capital management subsidiary, KLP Kapitalforvaltning, also manages equity funds certified by Norway’s Swan ecolabel, he said, which exclude all manner of arms producers.
“For KLP, the fundamental humanitarian principles will remain a guideline for any potential investment in defense companies,” Koch-Hagen said.
A spokesman for Alecta, Sweden’s largest pension fund, said the SEK 1.23 billion (€11.8 billion) provider is allowed to invest in defense stocks as long as these companies do not develop, produce, service or distribute components or systems specifically developed for controversial weapons. .
Asked if the defense sector would become more palatable to institutional investors given the war in Ukraine, Veritas CIO Kari Vatanen said the current situation underscores the fact that blacklists are not not a good tool for ESG.
“Blacklisting relies on black-and-white thinking that certain companies or sectors are completely bad even though their products are needed,” he told IPE.
“Classification is usually based on certain ethical standards within a cultural context and that can change drastically over time as new information or new cultural aspects are discovered,” Vatanen said.
For example, he said, nuclear energy was considered harmful to the environment 20 years ago, but it is now considered an environmentally friendly transition energy to the non-fossil economy.
“Similarly, we don’t know if sugar or fast food will be blacklisted in the next five to 10 years,” he said.
Rather than blacklists, Vatanen said that for Veritas, ESG means setting goals and measuring development and engagement with companies.
Yesterday, the IPE reported the views of the same panel of Nordic pension investment officials on the prospects for a tightening of monetary policy by the ECB.