ESG and armaments

Posted on: November 15th, 2023

ESG and armaments

There has been a lot of discussion recently about the investment area loosely referred to as ‘ESG’ – most of which ignores the fact that such funds have very different objectives, policies and intended clients.

I have explored this topic, and the core differences, in two recent media items, linked below.

Rather than taking sides or seeking to dictate the agenda – I have sought to explain the relevant issues that people should be thinking about when selecting funds.   I do so not because I lack opinions… but because clients preferences vary and no strategy suits everyone –  so understanding client preferences and fund strategies matters.




The original text, as submitted to ESG Clarity, is below: (The section in bold points to how our Fund EcoMarket database can help with fund selection:)


“Some thoughts on ESG and armaments:

There has been some discussion of whether ESG poses a threat to the armaments industry recently, effectively criticising funds with related exclusions.   Although difficult, not least because views vary on what constitutes ‘defence’ – this is an interesting topic.

One of the aspects that concerns me most about today’s debate is the apparent disregard for differences in opinion (not uncommon these days!), so I will briefly explore how and why different ESG, sustainable, responsible and ethical funds deal with the topic, in the hope of helping to bridge the emerging chasm.

Starting with the basics.  Fund strategies vary because people have different financial aims and personal preferences.  The fund industry responds to these, balancing them in different ways to suit different clients.

Some key strategy variations we see today are:

  • ESG ‘financial risk’ based avoidance, where some or all armaments companies – and or their suppliers – are not held because they fail environmental, social and/or governance related data screens – meaning they are deemed unattractive because they carry unacceptable risks. Such funds are typically regarded as focusing on ESG.
  • Values led exclusions – where funds have explicit armaments related policy exclusions. These funds publish exclusion policies which set out where they will not invest. Some exclude only manufacturers of strategic weapons systems, others extend that to non-strategic elements and suppliers – related enablers of military operations.  These funds are typically promoted as ‘Ethical’ or ‘Sustainable’. Amending those policies is difficult as would (theoretically at least) require contacting clients and risking complaints and potentially significant fund outflows.
  • Norms based exclusions – where exclusions are based on UN conventions and international agreements that oppose weapons causing ‘unacceptable suffering’, such as, cluster munitions, land mines and white phosphorus. Such exclusions are common across the investment spectrum.

Risk management, norms and values led criteria are often combined in individual fund strategies, indeed there is clear cross over between them.  From an investment management perspective such companies represent risks because of what they do, and for many – how they operate. Their  (understandable) lack of transparency is not something funds focused on risk management warm to.

From a client perspective, not everyone will care, but others do have strong views – both ‘for’ or ‘against’.   Opinions on the defence sector vary and are often deeply held – shaped by lived experience and, for many, faith.    One persons ‘defence’ is another ‘brutality’ and our views are reality we all rely on the military to defend us when things go badly wrong too often put in it the ‘too hard’ box.

Such debates also spill into gilt markets.  Whether or not gilts are ‘ethical’ is a debate as old as ethical investment field itself.  The reality is that we opinions vary, and thankfully free markets can cater for diverse views, so some sustainable and ethical funds hold gilts – others do not.

In fact, on our Fund EcoMarket database lists 31 primary funds that ‘exclude all gilts’, 58 that exclude ‘some’ gilts.  There are also 335 funds that ‘exclude armaments manufacturers’, indicating that direct investment in arms companies is a greater concern than investing in those that purchase their products.   

Avoidance of armaments manufacturers ranges across all our of ‘SRI Styles’ classifications – from the most lightly screened funds (our ‘Limited Exclusions’ style) to those that focus largely on ESG risk (‘ESG Plus’) – as well as those with more extensive strategies (eg Ethical, Sustainability, Environmentally and Socially Focused funds).

And that is unlikely to change.  Indeed the first ethical funds were deeply opposed to investment in the arms sector.  The first US ethical fund was launched for those opposed to the Vietnam War, and the first UK fund had its roots in the pacifism – with its Quaker and Methodist origins. Their appeal extends far beyond such groups today.

However, where we are today should be front and centre.  Russia’s invasion of Ukraine and the horrors in Israel and Gaza have brought this into sharp focus.  The world certainly feels like a scarier place than it did a few years ago.   The importance of ‘defence’ may therefore have shifted for many, although opposition to the use of internationally condemned weapons and selling weapons to abusers of human rights is unlikely to abate.  The fact defence sector shares have risen recently, puts this into perspective however.

So as our hearts go out to those in distress – as in some cases as do our spare rooms – we also need to focus on the future. And although there are much positive progress and wonderful innovation taking place we are still collectively failing to get to grips with global warming, which will make an escalation of conflict levels far more likely.

There may be little we can do to change where we are today, but we absolutely can and must move heaven and earth to drive down fossil fuel extraction and carbon emissions.  Both are firmly within our grasp.”


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