ESG and Ukraine’s War
The Russian invasion has raised questions about the balance between ethical investments and geopolitical realities. Once labeled as merchants of death, arms companies are now seen as crucial in countering brutal aggression. Governments worldwide are increasing military spending and supporting Ukraine, while European investors adhering to ESG (Environmental, Social, Governance) criteria remain hesitant to back defense manufacturers. Deutsche Bank’s research shows over 20% of mutual funds had already excluded weapons manufacturers before the crisis. Although some fund managers have reviewed their policies, more comprehensive changes are needed. Goldman Sachs reports that managers in the ESG space remain significantly underweight, ranging from 70 to 90%. This is particularly noteworthy as around $2.7 trillion of assets are invested in ESG equities.
The exclusion of defense stocks from ESG funds carries significant implications. Firstly, it drives up the cost of capital for arms manufacturers, resulting in fewer weapons being supplied to Ukraine by Western governments at the same expense. Secondly, ESG funds take advantage of potential returns from supporting a worthy cause. Analysts predict an average annual revenue growth of 10% in the European defense sector until 2025. Notably, companies such as Rheinmetall in Germany, Saab in Sweden, and BAE in the UK have witnessed substantial stock price gains, with some doubling in value since the start of 2021. The reluctance of ESG investors to embrace defense stocks reflects a resistance to adapting to changing circumstances. While the ethical investment movement strives for moral superiority, it risks becoming disconnected from geopolitical realities What do you think about ESG? And how has the ongoing situation in Ukraine affected it?
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.