Can you invest in a company that manufactures weapons while still upholding the ESG standards of sustainability and social responsibility?
For some ESG investors, the immediate and firm response is “No.” But others see the lines start to blur when the questions become more nuanced and more personal: How about a manufacturer of handguns, which every American has the right to own?
There isn’t a whole lot of formal guidance on this issue for U.S. investors. In the European Union, the closest thing to standards is a set of “minimum safeguards” for investors, which recommend prohibiting sustainable and ESG funds from owning companies with ties to controversial weapons like anti-personnel mines, cluster bombs and chemical/biological weapons.
Wherever you stand on the issue, these facts should be helpful.
Your ESG Fund Might Be Weaponized
ESG funds have been dipping their toes into weapons and defense stocks for a few years now. Russia’s invasion of Ukraine reignited the interest.
- Some 1,200 ESG-branded mutual funds held defense stocks last September, according to Morningstar. That’s up 25% from March of 2022 when Russia invaded Ukraine.
- More than half of all funds classified as sustainable by Morningstar have exposure to military weapons.
- At least 75 mutual funds and ETFs with a climate or sustainability mandate earned an F grade from the Weapon Free Funds website because more than 4% of their holdings were military contractors or weapons manufacturers, “including makers of controversial weapons like cluster bombs and white phosphorous.”
The Military is Not Climate Friendly
There is an increasingly close relationship between climate change and military technology. Manufacturing weapons is carbon intensive, and so is moving armies and navies across the world to foreign battlefields. Military and national defense efforts make up fully half of the greenhouse gases produced by government agencies.
These emissions increase exponentially when war breaks out, contributing to the already problematic issue of extreme weather events. By the time a child born today is 25 years old, extreme weather will cause $38 trillion worth of destruction each year and cost the average global citizen almost 1/5th of his or her annual income, according to the World Economic Forum and the journal Nature. Those hit the hardest will be citizens of developing countries—economies where both income and contributions to climate change are the lowest in the world. Oxfam says that the world’s richest 1% send more carbon emissions into the air than the poorest 66%.
Food is Used as a Weapon of War
One of the most devious strategies in military conflicts is the use of blockades and embargos to prevent the general population from receiving the essentials necessary for survival. Almost 300 million people faced an acute food crisis in 2023. Shortages so severe that their lives were in imminent danger, according to the most recent Global Report on Food Crises. Even worse, roughly 700,000 people were on the brink of starvation in 2023, double the number in 2022.
The leading cause was war.
But What About…?
There are two common objections to eliminating “weapons” from ESG oriented investments:
Almost anything can be used as a weapon.
Really? Should we avoid automobile manufacturers in our portfolios because cars were responsible for 42,514 deaths in the U.S. in 2022? Cars are designed and manufactured to be as safe as possible, avoid injuries and prevent deaths. Weapons are designed to kill people. That’s their purpose.
Companies manufacture weapons that are strictly defensive.
Sure there are defensive weapons, like Israel’s Iron Dome, an air defense system that intercepts incoming missiles. But most of these companies make other weapons that are not defensive. For example, Raytheon makes air defense systems along with the 1,000-pound Tomahawk missile, capable of killing as many as 80,000 people in urban areas. Each missile costs $2 million.
Making Your Decisions
The Stockholm International Peace Research Institute (SIPRI) ranks the top 100 arms manufacturers and military services companies in the world in its Arms Industry Database. There’s no question about the financial attractiveness of many of these “defense” contractors and weapons suppliers. The sale of U.S. military equipment to foreign governments rose 16% in 2023 to a record high $238 billion, according to reports from the U.S. State Department in January.
This is where ESG investors have the power to make a positive difference. If you can justify owning weapons suppliers, defense industry stocks or gun manufacturers in your portfolio, take steps to hold these corporations responsible to fulfill the other aspects of ESG investing such as ethical supply chains and promoting workplace equality. Their financial responsibility for fixing the problem should be commensurate with their contributions to the problem.
If you don’t want weapons in your portfolio, be sure they aren’t in any of your mutual funds by screening them through the tool on the Weapon Free Funds website.
The most basic principle of sustainable investing is, “Do No Significant Harm.”
For more insights and guidance on navigating the evolving landscape of ESG investing, stay tuned to our blog for future updates and expert analyses.
And help us build a more sustainable and prosperous world through responsible investment practices by becoming a member of the Advance ESG community. It’s free to join and there are no future financial obligations. Together, we can make a difference in safeguarding our planet for future generations.
