The ESG credentials of defence stocks have come into keen focus this year.

This has proven particularly true in the Nordic region, as Sweden and Finland draw closer to joining Nato, while the Danish pension and insurance trade association advised its members to invest in the Danish military in order to meet Nato defence spending targets.

Given its proximity to Russia, Finland is arguably in the most prominent position in the debate.

However, for the likes of Hanna Kaskela, director of responsible investment at Finnish pension insurance provider Varma, there has been little change in approach.

On the contrary, she said Varma would be ramping up its enhanced ESG monitoring for defence stocks to include, among other things, an analysis of companies’ arms control agreements.

‘For us, we have assessed the business based on the product. What we will be starting to assess now is how the equipment is being used,’ Kaskela told Citywire Selector.

It is, perhaps, easier to keep your ESG fund policies in place if they already allow defence investments, as is the case for Varma.

Finnish asset management firms Evli, Aktia Asset Management, OP Asset Management and LocalTapiola Asset Management, which all have conventional weapons exclusions in some of their sustainable strategies, have not altered their ESG stance on defence either.

‘We have not made any changes,’ Outi Kalpio, director of portfolio management and ESG at LocalTapiola Asset Management, told Citywire Selector.

The firm excludes conventional weapons from actively managed direct equity and credit funds, which are all classified as Article 8 or 9 under Sustainable Financial Disclosures Regulation.

‘Being an active investor, we feel there are other ways to support national defence than through investments,’ Kalpio added.

Evli, which is one of the largest asset management firms in Finland, has adopted a product-wide ESG exclusion policy that bars companies that generate 0.1% of sales from controversial weapons. Controversial weapons are defined as landmines, cluster munitions, nuclear weapons, depleted uranium, chemical weapons and biological weapons.

A stricter exclusion for companies deriving over 5% of revenues from any conventional weapons applies to certain funds.

Revenues reviewed

Since many weapons companies derive some of their profits from controversial weapons, products or services, Evli’s 0.1% revenue threshold excludes most of the industry.

‘These exclusion policies have been set in place based on ethics and fundamental humanitarian principles that we want to uphold and support,’ said Petra Hakamo, head of sustainability at Evli. She added that she does not consider defence stocks a sustainable investment.

‘The social category of ESG is very much defined on protecting human rights and humanitarian principles.

‘There are big question marks around how companies can ensure that their weapons are used only for defence purposes, and not for the opposite,’ said Hakamo (pictured above), referring to the possibility of Western weapons being sold to undemocratic regimes.

Similar to Evli, Aktia’s sustainable funds exclude all companies that derive 5% of sales from conventional weapons and 0.1% revenue from controversial weapons, and the war hasn’t resulted in any changes in client demand nor the firm’s values.

‘Although every country has a right to defend themselves, there is no safe way to invest only in weapons that would be purely used for defending or peacekeeping activities. We see that there will always be social and governance issues involved in the weapons industry,’ an Aktia spokesperson said.

Sweden’s ESG embrace of arms

While S-Bank Wealth Management hasn’t changed its stance – as it allows defence stocks in its sustainable funds as Varma does – its chief investment officer Mika Leskinen told Citywire Selector that ‘this is a moment to think again’ for firms excluding conventional weapons.

This seems to have been the case across the Baltic Sea, where investor sentiment has been more influenced by Russia’s invasion of Ukraine.

SEB was the first Swedish firm to make headlines when it changed its sustainability policy to allow defence stocks early after the invasion. Swedish boutique Söderberg & Partners went one step further and opened up its sustainable funds to weapons.

‘For a long time, it’s been industry standard to exclude defence and weapons businesses from investment solutions classed as “sustainable”.

‘But the current geopolitical situation shows that there needs to be a nuanced discussion regarding the role that defence materials and weapons can play in the process towards global sustainable development,’ the firm wrote on its website in response to the change.

While Swedbank Robur has not made any changes to its exclusion policy, which doesn’t exclude defence companies from sustainable funds, the company has recently bought shares worth SEK 4.1m (€390,000) in the Swedish defence manufacturer Saab.

This makes Swedbank Robur, which had no exposure to the sector in April last year, now Saab’s third-largest owner according to Dagens Industri.

‘Like other actors in society, we see the need for a defence industry to secure democracy and stability,’ a Swedbank Robur spokesperson said. ‘We don’t classify investments in defence stocks as unsustainable, but we believe that investments in this sector require a more encompassing risk assessment and continuous follow-ups.’

Nordea Asset Management, which allows conventional weapons in its sustainable funds but applies stricter exclusions for the ESG Stars strategies, Generations strategies and Article 9 funds, will keep its current exclusion policy, according to a spokesperson.

‘The UN principles grant countries the right to self-defence, which means the right to defence. This means that we don’t exclude all defence companies, but that we have restrictions when it comes to the type of weapons,’ a Nordea spokesperson said.

However, not everyone is on par with Sweden’s ESG embracing of arms.

‘It is completely absurd that investors, particularly Swedish ones, have started classifying defence stocks as ESG investments,’ Sasja Beslik, a Swedish ESG pioneer and recently named CIO of SDG Impact Japan, told Citywire Selector.

‘I think it’s wrong and far too short-sighted. There’s never been a lack of money in the military industry, and it’s not really where investments are needed,’ he added.