Ethics and Defence – are they compatible?
Back
Article Type
Sustainability Soapbox
Topic
Opinion
Published
March 11, 2025
Read time
5 mins
Author
Miranda Beacham
Share

100 Labour MP’s have written an open letter to urge fund managers and banks to stop viewing Defence companies as “unethical”.

 

While we absolutely understand that the world is in a perilous state now and Europe is restocking its armaments, are fund managers’ ‘ethics’ really a problem? The terminology of Ethics has specific meaning in fund management. Ethical funds exist for clients that have clear ideas of sectors they want to avoid – one of those common exclusions are aerospace and defence companies. However, the latest Investment Association (IA) figures state that the ESG fund market is 6.9% of Assets Under Management (AUM). Ethical funds are a subset of that grouping, around 1% AUM. So, is this a problem to the defence industry? 

 

The other 93.1% of AUM will integrate ESG into their investment process in most cases. What does ESG integration mean? It is the integration of financially material factors into the fundamental analysis of investments. This is to consider factors that will have a positive or negative financial impact on the company e.g. adverse weather conditions caused by climate change for insurance companies or number of safety recalls for pharmaceutical companies. This is what some would argue is good investment decision making. 

 

Where does Aerospace and Defence come into this? Mostly companies that breach international treaties or are still manufacturing weapons that are deemed controversial such as cluster munitions or those using white phosphorous would fare less well than the innovative defence companies that are seeking to protect civil liberties while trying to minimise collateral damage. In fact, most of the former companies are on exclusion lists of investment companies. The latter are analysed in the same way as any other potential investment company and the recent share price rally shows that investment managers are trading in these stocks.

 

The IA published a letter in conjunction with HM Treasury in April 2024 stating that the UK Investment industry fully supports high-quality, well-run defence companies, which is reflective of the general mood of the market. So, while a small proportion of the Assets Under Management will not invest in these companies, this is due to client preference rather than an industry moral compass gone awry. The criticism in this case seems unfounded given the broader market context. 

Disclosures
Sustainability Soapbox monthly email sign-up

As passionate advocates for sustainable investing, this is our Soapbox. In this monthly update we put forth an unashamedly positive case for sustainable thinking and sustainable investing.

Sign-up for the monthly Sustainability Soapbox email

Author

Miranda Beacham
Head of UK Responsible Investment

Miranda Beacham is head of UK responsible investment. Her role involves overseeing the environmental, social and governance research process for ethical and sustainable funds as well as overseeing the stewardship activities, supporting the ESG integration processes and further research in ESG issues for investments across Aegon AM UK.

View profile
Related Articles
View all Aegon insights