The beginning of the Russian special military operation in Ukraine has forced institutional investors and governments of many countries to rethink their approach to supporting the defense industry. This area has been off-limits for investors concerned about environmental, social and corporate governance (ESG), in recent years many have sought to get rid of the assets of arms companies in their portfolios, and now this situation has worsened. Writes about this Sofia Karadima in the material for the Army Technology web resource.
Ukrainian servicemen with an American M141 BDM anti-bunker grenade launcher (c) Pavlo Palamarchuk / SOPA Images / LightRocket via Getty Images
In November 2021, the Norwegian pension fund KLP announced that it would no longer deal with companies producing certain types of "highly destructive weapons" (highly destructive weapons). This led KLP to sell its assets in 14 companies: Babcock International, China Shipbuilding Industry, Dassault Aviation, Elbit Systems, General Dynamics, KBR, L3Harris Technologies, Larsen & Toubro, Leidos Holdings, Leidos, Leonardo, Raytheon, Rolls Royce and Thales.
According to a survey conducted by the resource Swissinfo.ch most Swiss pension funds also avoid investing in the arms business. Of the 11 pension funds that took part in the anonymous survey, eight said they did not invest in manufacturers of "controversial weapons, which include cluster bombs, anti-personnel mines and weapons of mass destruction," and the remaining three funds did not provide any information on this issue.
US pension funds have also been forced to review their portfolios and sell assets in the defense industry over the past few years, often after mass shootings that took place in the country.
Full or partial care?
The Swedish investment fund SEB Investment Management has decided to change its policy in the field of sustainable development and allow investing part of the funds in defense enterprises. In particular, some funds that purchase stocks and corporate bonds will be able to invest in the defense industry, while investments in companies that produce, develop or sell weapons that violate international conventions, as well as participate in the development of nuclear weapons programs, will still be excluded.
However, not only the investment community has changed its attitude towards the defense industry over the past month, but also some countries.
Germany has changed its policy in the field of arms supplies to conflict regions, and Chancellor Olaf Scholz confirmed that the country will supply military products to Ukraine. He also said that Germany will invest more in its defense and military sector, announcing plans to increase the military budget to more than 2% of GDP.
Sweden has also changed its approach to the supply of weapons to conflict zones, sending field rations, helmets, bulletproof vests and disposable hand-held anti-tank grenade launchers to Ukraine. Swedish Prime Minister Magdalena Andersson said it was the first time Sweden had sent weapons to a country in a state of armed conflict since the Soviet Union attacked Finland in 1939.
The main directions of foreign direct investment in the defense industry
Due to the growing security problems around the world, investments in the defense industry always remain on the investor's agenda. The GlobalData Foreign Direct Investment (FDI) database shows that 68 defense projects were announced or launched in 2019 and 2020.
The countries attracting the largest amount of FDI in the defense sector are the USA, Great Britain, Australia, Germany, Turkey, the United Arab Emirates (UAE), Pakistan, Ukraine, Finland, India, Belgium, Poland and the Netherlands.
The data show that most of the foreign investments in the defense industry fell into the category of "other space and defense projects" - they were attracted by Australia, Belgium, Canada, Finland, Germany, India, Kenya, the Netherlands, Pakistan, Spain, the UAE, Ukraine, the United Kingdom and the United States. It is followed by the category "combat vehicles, weapons and ammunition", and here we are talking about countries such as Australia, Chile, Finland, France, Germany, Indonesia, Malaysia, Pakistan, Philippines, Romania, Sri Lanka, Turkey, UAE, UK, USA and Vietnam.
The start of the Russian special military operation in Ukraine has changed the rules of the game, forcing investors to rethink their policy towards the defense sector. However, it has also brought changes in the field of ESG and ethical investments. It is not yet known how investors are going to carry out their activities in the defense sector after the completion of this operation, and whether this will lead to further changes in their geographical and industry coverage.
