Defence and ESG – from the Ethics of Conviction to the Ethics of Responsibility

This shift is illustrated in the financial sphere by a radical reversal of posture: while the production and trade of arms were rejected by many investors as "inherently unsustainable", the combination of industry lobbying, political awakening and the transatlantic trust crisis seems to herald a reverse pendulum effect, and we read here and there that any investment in defence would be "inherently sustainable". Are these extreme positions reasonable and effective? It is worth revisiting the history of investors' ethical concerns regarding the sector to understand the mechanisms and attempt to outline what could be a new, responsible and active approach to addressing the challenges of defending democratic societies.

Exclusion, an Old Story

The concept of "controversial" weapons emerged in 2003, with the use of cluster munitions by the US military in Iraq. The publication of French banks’ first public policies regulating their activities in the defence sector occurred around the turn of the 2010s. However, the concerns of some investors regarding this sector are much older. The first fund excluding investment in arms, the Pioneer fund, dates back to 1928. It was then a response to the demand of investors who, for religious reasons, wanted to stay away from sin stocks. In the 1960s, this approach, conveying an ethic of conviction, joined more secular activists in protesting against the Vietnam War, which invented "name and shame", denouncing the participation of major military-industrial complex groups in the conflict. This approach still considers weapons to be inherently "bad" and that to eliminate war it is sufficient simply to eliminate weapons. In fact, exclusion was SRI (Socially Responsible Investment) funds’ most common management mode in Europe until 2018¹. This exclusion was made all the easier given that the European arms sector was undergoing a substantial contraction, surviving thanks to exports that were controversial, and did not represent a major share of the investment universe. In short, from 1991 to 2022, the ethic of conviction was easily applied without weighing too much on investors' results...

A Reversal of the Trend?

The plans of the European Commission and the voluntarism displayed by several member states, the Baltic countries, Poland, Germany, France... should not make us forget the power of the current of denial and refusal in Europe. During the event organised by the Commission in November 2024 for the financing of the DTIB (Industrial and Technological Defence Base), several financial institutions expressed doubts or simply refused to consider becoming involved in a sector still perceived as "immoral". Personally, even in France, this year I have met generalist fund managers reluctant to open up to defence, but also business line managers who, while admitting that it "should be financed", hoped this would be "temporary". Conversely, the industry, supported by some politicians, is now striving to make it accepted that any investment in defence would be "ESG by nature", security being the condition of sustainability. Implicitly, the idea is growing that DTIB companies should be exempt from any ESG evaluation. In both cases, the positions are unsustainable and will not provide a response to the challenges of the time...

An Urgent Need for a "New ESG"

The return of the use of force in international relations is not a temporary crisis but a lasting change in the state of the world. It is linked to structuring forces on a global scale: climate change, diminishing resources, disruptive technologies and anti-democratic imperialist ideologies. In this context, Europeans have the choice between investing in their defence or at best suffering vassalisation and at worst annihilation. But defence companies cannot escape reality: their governance concerns the whole of society, which pays for what they produce. The working conditions of their employees and subcontractors are a condition of their sustainability and effectiveness. Taking into account decarbonisation and seeking greater circularity of the economy are imperatives for emancipation from illiberal energy suppliers and strategic autonomy. There are therefore indeed extra-financial criteria – ESG – that must enable them to be evaluated. And there are investment wagers to create future profitability, as has been the case for renewable energies. This therefore implies abandoning not ESG, but the ethic of conviction that excluded without thinking to move towards an ethic of responsibility.

Stéphane Audrand, International Risk Consultant, Sylmaris