Posted on: May 1st, 2025
Debates around whether or not sustainable investment funds can, or should, invest in the defence sector are high profile at the moment.
This led to the FCA clarifying their position recently – which is essentially that there are no rules governing what funds or fund managers should do. Fund managers can do as they chose.
I am no military analyst, however having spent many years working with funds that had Quaker (and Methodist) origins this is something I’ve discussed a great deal – and recognise as being important to many people.
The following are some thoughts on what financial advisers, portfolio managers and others might like to consider, starting with the basics:
Firstly it is important to acknowledge that much has changed recently – however opinions will doubtless continue to vary. Concerns are heightened, and longstanding certainties are now being questioned. And as defence spending looks set to increase it is fair to regard investment opportunities will increasing also.
However, we will never all agree. Different people, including fund managers, ask different questions and have different points of view. Some people will doubtless continue to want nothing to do with the defence sector. Others are, and will remain, enthusiastic supporters of it – meanwhile others will be between these two extremes. This ‘middle ground‘ group is likely to have concerns that define where they ‘draw the line’ – and that line may edge up or down over time.
The fact investment strategies vary is to be welcomed as it reflects the views of real people, in the real world.
From an intermediary’s perspective this points to the need to identify client preferences – in line with Consumer Duty– so that suitable options can be identified – and the risk of awkward questions being asked further down the line can be diminished.
The second area to consider is commitments made to clients. Trust is rightly important in investment – so if a product or service has been sold with a particular set of policies managers should think carefully before making changes as trust could be undermined if ‘reasonable expectations’ are not met. Some aspects to consider include:
Many funds and portfolios are a combination of the above, so in the real world this more complex.
A third area for consideration is what a company, or other asset, does. Assets that are commonly excluded sit on the spectrum. Some are more likely to be excluded than others. Examples include:
Different funds and portfolios will have different policies for different elements of this chain, and indeed their use of language (eg military vs defence) may also vary.
Companies that make weapons systems and other products intended specifically for defence (armaments) purposes tend to be regarded as more controversial than others essentially because their products are designed to kill people – although many will argue sensibly that deterrents play an important part in society also.
The most significant concerns tend to focus on two core areas, with the following questions (or similar) asked:
It is understandably almost impossible to collect entirely reliable answers to these questions, as defence contractors are not renowned for their transparency – for obvious reasons. However assessments of this kind are made and fund managers have to decide whether or not uncertainty should equate to exclusions.
Defence may be a ‘popular’ investment theme today as a result of world events, but opinions have a habit of evolving over time.
Investors that do not make their positions sufficiently clear may find themselves vulnerable if an asset they hold falls foul of public opinion further, particularly if clients are surprised.
Other points to consider:
Fund EcoMarket filter options can help advisers, wealth managers and portfolio managers respond to their clients different options by enabling users to search the following:
Relevant fund filters (see the Social & Ethical fund filter area).:
Relevant fund management (company wide strategy) filters (see ‘Responsible ownership – what and how?’ section)
The strategy combinations may surprise some.
As with all filters of this kind – if a fund manager has not told us that they explicitly avoid a named activity (eg controversial weapons) it is possible they may invest in the area – although we can not know for certain. (Please contact fund managers directly if clarifying this is important to a client).
Additional note: Please be aware that some fund managers are reviewing their strategies in this area. Fund EcoMarket information comes directly from fund managers and is regularly updated however results should be confirmed directly with managers if this is important to a client.
https://www.fca.org.uk/news/statements/our-position-sustainability-regulations-and-uk-defence