What about risk?
And the ‘purpose’ of focusing on ESG has always been around enhanced risk management.
Russia’s actions clearly shout ‘risk’ on many levels, so arguing in favour of defence spending is clearly not as contentious as it once was.
Likewise, funds with a core focus on ‘sustainability’ may not necessarily go as far as ethical options. Funds must do as they promise so I would not expect existing funds to switch, but it may be that there is room around the perimeter.
However, the core purpose of weaponry is to kill people of course which, I must stress, is the complete opposite of what sustainable funds are for. And there are other issues around governance, transparency, environmental implications and more that are highly problematic also, so I would not expect major arms manufacturers like BAE to warrant a second glance in these funds.
But the situation in Ukraine and the threat from Russia are both real – and people are suffering. As a result, extensive exclusion, including that of suppliers which make specific generic components, or offer support services might now sound strange to some.
As a result, I would expect funds in this general area to remain vigilant about both ‘what companies do’ and ‘how they operate’ – and perhaps even see some see enhanced caution around who products are sold to (see Freedom House ‘Global Freedom Status’ map). However, I do not think it is right to imply that this area is entirely ‘black or white’… as with most things ESG, there are shades of green – and grey.
Focus on the facts
And from an investment perspective we need to keep a few facts in mind.
Within our whole of market Fund EcoMarket database -a directory designed for financial services intermediaries – we lists 221 primary retail funds that say they ‘Avoid armaments manufacturers’. 153 of these also ‘Exclude civilian firearms production’.
We only classify 28 of these as being primarily ‘Ethical’ funds – strategies that lead with values- related issues. The others are labelled as Sustainable, Environmental, Social – or ESG Plus or Sustainability Tilted strategies, so clearly many of those funds have military exclusions also. (Be aware that some fund managers do not supply us with detailed data, so 212 may be an underestimate.)
But, however you look at this and in spite of the phenomenal growth of ethical, sustainable, ESG and Impact investment, these remain a fraction of the many thousands of funds that are available and only a small proportion of AUM. Fund strategies already vary too, which is why transparency is so important. Advisers and clients need to know what funds set out to do.
I am entirely in favour of clients having sufficient choice – and clearly that is what they have. People who want to invest in companies like BAE have an immense smorgasbord of options.
Crucially, for intermediaries, it is important to keep in mind that people are never going to all agree on a topic like this. Opinions will always vary. And, of course, BAE want all the investors they can get… but I’d not personally expect any big changes in ethical or ESG options soon.
Clients’ personal opinions matter, what they were sold matters, and changing fund strategies is tough. However, the world has changed, and it may be that new or recently converted funds start to reflect that.
*https://www.thetimes.co.uk/article/ethical-fund[1]managers-should-look-again-at-our-defence-stocks-saysbae-pj62xg5sc
About Julia Dreblow and SRI Services
Julia is Director at SRI Services, Founder Fund EcoMarket fund tool and FCA DLAG member. She has worked full time in sustainable and responsible investment since 1996, having first become involved in 1991. SRI Services was set up in 2009 – shortly after leaving Friends Provident, where she had been their SRI marketing manager (and related roles) for 12 years. SRI Services’ main focus is the Fund EcoMarket fund tool, however it is also involved in related specialist consultancy (mainly with DFMs and platforms) as well as running events and working with others including UKSIF, the BSI and PIMFA.
SRI Services is not authorised or regulated. They do not offer advice and do not deal with individual investors. The information they provide is ‘for information only’ and not to be considered advice of any kind.
SRI Services is the trading name of SRI Consultants Ltd.
