Do ESG Portfolios Include Weapons?

Does investing in weapons sound like a socially responsible investment strategy? And, do weapons companies fit within an ESG investment portfolio? Many ESG investors would say, No! But, many ESG investors are also inadvertently investing in weapons companies through so-called ESG funds. So, this post will explain how weapons companies can find themselves in many ESG portfolios, and what investors should do to correct this potential error.

The Surge of Defense Stocks in ESG Funds

The presence of Aerospace & Defense stocks in ESG portfolios has been on the rise. Data indicates that a significant number of funds classified under the ESG umbrella have begun holding military assets. This shift is particularly notable in the aftermath of geopolitical events like the invasion of Ukraine, highlighting a complex relationship between global security needs and investment ethics.

The Ethical Debate: Defense or Aggression?

One of the central dilemmas in including weapons companies in ESG portfolios is distinguishing between investments used for defensive purposes versus those contributing to aggression. This issue is particularly challenging given the nature of the defense industry and its global implications. The defense sector’s role in ensuring national security is often pitched against the ethical concerns of investing in companies that produce lethal products.

Investors’ Dilemma: Aligning with ESG Principles

Many investors struggle with the concept of including defense stocks in ESG portfolios. The United Nations’ 16th Sustainable Development Goal, which focuses on peace, justice, and strong institutions, seems at odds with investments in the defense sector. There’s a growing concern that the ESG label might lose its meaning if it stretches to include investments in weapons, traditionally viewed as contrary to the principles of socially responsible investing.

Regulatory Landscape and Market Responses

The inclusion of defense stocks in ESG funds is not uniform across the board. In some regions, stricter ESG classifications have led to a retreat from defense assets. However, in other classifications, the exposure to defense stocks remains, albeit minimal. This disparity underscores the lack of a unified stance on the issue and the challenges in enforcing consistent investment standards.

The Investor’s Path Forward

For investors concerned about the presence of defense stocks in their ESG portfolios, vigilance and due diligence are key. Understanding the specific holdings of ESG funds and the criteria used by these funds for investment selection is crucial. Investors may need to look beyond broad ESG labels to ensure their investments align with their ethical standards. Our family office provides complimentary reviews of investment portfolios. Therein, we present investors with a report detailing how a portfolio may align with an investor’s stated objectives.

ESG Weapons Examples

There are very few publicly traded weapons companies in Canada. So, Canadian investors don’t need to be too concerned. But, when investing in US stocks, investors need to be more vigilant.

For example, consider the iShares ESG Aware MSCI USA Value ETF, which contains a whopping 9 military weapons companies representing just under 4% of the portfolio. If investors go to iShares website, they’ll see the fund reports only 0.43% of the portfolio representing weapons. But, when investors dig a little deeper, they’ll find that the way the index provider and fund companies categorize weapons might not always screen out certain sectors. This is mainly due to how companies are classified. And, this is why investors need to do their own analysis or work with advisors who incorporate such analysis into their recommendations.

Investors might also consider consulting 3^rd party tools like the database at WeaponFreeFunds.org to do additional screens rather than relying on their advisor or fund company documents alone. Our family office provides our clients with detailed analysis to ensure their investments match their stated values. Please contact us for more information.