Sustainability in the defence sector

The war in Ukraine has brought focus to the aerospace and defence sector, which has seen an outperformance this year. As the war rages on, Allianz Global Investors discusses the role of defence companies in sustainable investment portfolios as spending on defence rises.

The majority of sustainability investors exclude the defence sector from their portfolios as their involvement is considered controversial and inconsistent with green investments. However, AllianzGI notes that there is no clear definition of what is ‘controversial’.

The investment management firm goes on to explain certain investment exclusions for specific weapons — European countries forbid investments in companies producing landmines, cluster munitions, and chemical or biological weapons, some investors include companies involved in nuclear weapons and lastly companies that produce military equipment and services.

AllianzGI talks about its own policy for portfolio exclusions but acknowledges that defence spending will get a boost due to geopolitical instability and security concerns. “Defence budgets are expected to rise steadily in the coming years following a long period of underfunding, particularly in Europe,” says Guirec Thouement, analyst within AllianzGI’ Sustainability Research team.

The question of whether investments in the sector can fund more resilient defence infrastructure remains unanswered, and that new controversy may pop up as defence innovations move ahead.

While excluding such companies is one option, Allianz Global Investors says that active investors can exert influence through engagement. Improved disclosures can help investors gain a better view of supply chain governance and audits of internal processes, in a sector which can be exposed to bribery corruption and high political influence.

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