Bombs, guns and fighter jets aren’t typical E.S.G. investments, but two Citi analysts say they should be. Advocates for “socially responsible” investing call the idea “absurd.”
Russia’s invasion of Ukraine has upset the world order. It could conceivably alter the way some people think about investing, too.
At least that’s the view of two analysts with Citi, who argue that the height of social responsibility at this moment requires putting your investment money into the stocks of companies that make weapons.
“Defending the values of liberal democracies and creating a deterrent, which preserves peace and global stability,” is so important that weapons makers should be included in funds that carry an E.S.G., or “environmental, social and governance,” label, the two analysts, Charles J. Armitage and Samuel Burgess, wrote.
That labeling seems utterly bizarre for some E.S.G. investors, however.
It certainly does to Andrew Behar, the chief executive of As You Sow, an advocacy and research group that frequently files shareholder proxy proposals on E.S.G. issues.
“We don’t think that you should have any weapons systems in an E.S.G. fund,” he said. The group provides an online tool on the web site Weapon Free Funds that enables investors to screen mutual funds and exchange-traded funds on this issue.
The point of absurdity
Leslie Samuelrich, president of the Green Century Funds, which was founded by nonprofit groups, including the California Public Interest Research Group and the Citizen Lobby of New Jersey, was appalled by the notion.
“This is absurd,” she said. “It feels very opportunistic and shallow.” She added that Ukraine needed to be defended. “I’m part Ukrainian,” she said. “Of course, they need weapons.”
But she said that had nothing to do with investing in funds devoted to socially responsible investing. “Those who argue that weapons belong in a sustainable portfolio are capitalizing on the horrific attack,” she said. “Excluding military and civilian firearms has been a long-held screen by authentic responsible investors.”
Mr. Armitage and Mr. Burgess, the Citi analysts, make a vigorous counterargument. Essentially, it boils down to this: Without strong militaries capable of “defending the values of liberal democracies and creating a deterrent” against geopolitical adversaries like Russia and China, there can’t be much progress on other pressing global issues.
They acknowledge that E.S.G. investing has become a big deal in the United States and, even more so, in Europe. And they say that stocks that are identified as E.S.G. or green — those of companies with relatively low carbon emissions — are trading at a premium. They were unavailable for an interview, but in a series of research notes and in a conference call with clients since Feb. 1, they noted that with the rise of the E.S.G. movement, military contractors have fallen out of favor with many investors, particularly in Europe.
They would like that to change, in part through a technical measure: by labeling military contractors as E.S.G. compliant in the European Union’s so-called taxonomy regulations, which aim to be “a gold standard” in guiding private and public investors. Those regulations have already been the subject of fierce debate because of a decision to label some nuclear power and natural gas plants as “transitional” green investments.
A boon for military stocks
Weapons companies will be included as acceptable socially responsible investments if the tide keeps turning, the analysts contend. In a note on March 2, they said Russia’s assault on Ukraine had accelerated geopolitical shifts that are making military spending more popular among NATO countries, both with masses of people and government elites. The conflict in Eastern Europe is leading to increases in military spending by NATO countries, and that bodes well for military contractors and their stocks, they say.
Germany, France, Britain and other nations are likely to exceed the long-deferred target of spending at least 2 percent of their gross domestic product on the military, the analysts added, creating great opportunities for military contractors.
Russia’s invasion has already led to a steep rise in the shares of military stocks. The Fidelity Select Defense & Aerospace Portfolio, which tracks the industry, leapt 8.1 percent from Feb. 24, the date of the invasion, through Thursday, compared with a gain of 3.3 percent for the S&P 500 stock index, including dividends. The German DAX index fell 6.4 percent in the same period.
The Fidelity fund includes Boeing, Northrop Grumman, Raytheon Technologies, Airbus and Lockheed Martin among its holdings.
The analysts said that without strong military forces, “growing tensions, particularly in Eastern Europe, are likely to remind investors that safe and free societies cannot be taken for granted. We believe defense is likely to be increasingly seen as a necessity that facilitates E.S.G. as an enterprise, as well as maintaining peace, stability and other social goods.”
The ‘elephant in the room’
But they conceded that, until now, many people with a progressive bent have rejected these arguments, largely because of an “elephant in the room.”
“Stated simply, most defense companies have, within their product range, arms, technologies and munitions which are ultimately designed to harm, incapacitate or kill humans,” the Citi analysts acknowledged. They added, “The phrase ‘defense exports’ will likely make E.S.G. investors uneasy.” One way of making arms exports more palatable, they suggested, is to point out that they “have been scrutinized and approved by a democratically elected government.”
The Russia-Ukraine War and the Global Economy
Rising concerns. Russia’s attack on Ukraine has started reverberating across the globe, adding to the stock market’s woes and spooking investors. The conflict could cause dizzying spikes in prices for energy and food, and severely affect various countries and industries.
Labels do matter for stock performance. Lubos Pastor, an economics professor at the University of Chicago, has documented that concern about climate change has increased the returns of stocks that are known as green. It is plausible that the performance of military stocks — before the current outbreak of war — was impaired because the sector put off many investors.
But Professor Pastor said he was not troubled by the idea of calling an investment in a military contractor socially responsible. “Although self-appointed arbiters of responsibility may believe otherwise, leaders of our elected government, both Democratic and Republican, have always believed that having a strong military was socially responsible.”
Still, providing for national defense in a time of war is one thing, said Jon Hale, director of sustainability research for the Americas at Sustainalytics, a unit of Morningstar, the research company. Exporting weapons that may be used against civilian populations is another matter entirely, he said.
One example might be Raytheon, an important U.S. military contractor, he said. Raytheon is a major supplier of arms to Saudi Arabia, which used them to bomb civilians in Yemen, The New York Times has found.
“That might not bother some people who are committed to sustainable investing,” Mr. Hale said, “but it will bother a lot of them.”
At a certain point, he said, when you start labeling things like weapons as “sustainable investing or socially responsible investing or E.S.G.,” you will find that you are on “a slippery slope,” he said.
“Virtually any business or industry can concoct some rationale for what they do and call it sustainable and make an argument to include it in a taxonomy or category or what have you.”
Defending Ukraine or bolstering NATO defenses may have great appeal right now. But it may make more sense to simply call it what it is, military spending, and not try to give it the same gloss as a project to stop global warming or reduce income inequality or advance social justice or whatever else you may really consider “socially responsible.”
Labeling military spending as socially responsible “threatens to make all your labels meaningless,” Mr. Hale said.
