CB: So, Mike, the ethics of defence. We’ve been seeing repeated calls from politicians and others for investors to start directing more capital towards defence companies, and it looks like ESG and ethics-focused investors are no exception. What do you think of this?
MH: I certainly think it’s...interesting. It’s the first time in the 27 or so years that Ethical Screening has been operating that this question has come up. Before now, the status quo has pretty much been avoiding most links to armaments in ethical funds et cetera, and certainly avoiding links to companies that produce the real strategic stuff, so your tanks, missiles, and the like.
CB: So why do you think this is changing? Are you surprised?
MH: Not overly surprised, no. I think with the Russia-Ukraine war, and what appears to be some big changes in the global order, governments and individuals are getting a little more nervous, and apparently having a big pile of guns can help people feel safer. Which I do understand, I hasten to add. I imagine most Ukrainians slept a little easier when the first shipments of anti-tank gear arrived from the US.
Topic One – Actions for Managers
CB: Now, the first thig I want to discuss is what it is that you think managers should be doing? Should they be reversing any polices that prohibit investment in defence companies, if they have them?
MH: No, or at least not entirely. What is needed now, I think, is conversations. Regardless of what any particular manager thinks about national defence, their job is to meet the needs of their clients, and so understanding how their clients feel about defence is the first port of call.
CB: Would these be conversations about whether to invest or not invest, or will they perhaps need to be more nuanced than that? Would they need to be about how far clients are willing to go when it comes to companies linked to defence?
MH: Exactly that. For some clients, the answer might be an outright “no”. Certain faith groups, for example won’t want anything to do with companies linked in any way to arms, and that should be respected. Our view when it comes to our individual clients is always “your ethics, not ours”.
CB: And what about other clients? The ones who are less black-and-white?
MH: This is where it can get a little trickier. Managers will need to ascertain where clients draw a line, assuming they draw one at all. For some, it may be a case of “avoid links to bioweapons and landmines, and I’m happy”, but for others it may be more complex. Take the standard criteria we screen for here at ES - we differentiate between non-strategic and strategic products. Some of our clients and our client’s clients are not opposed to their money being linked to companies that provide building services to the likes of the MOD, providing it’s just building of accommodation, let’s say. But what they’re not happy with is being linked to companies that produce missiles, or missile launching platforms, or even custom-made components for missiles.
CB: That makes sense, after all ethical convictions can vary from person-to-person, group-to-group.
MH: They can indeed, and that’s why understanding these is so important. Advisers, managers, or anyone who wants to help people with their money while considering their views should never just assume what people believe. People of no-faith might still be pacifist, for example, and will not want their money being linked to weapons.
CB: But the opposite can also be true?
MH: Exactly. Just because someone has a faith, it doesn’t mean they’re not entirely opposed to armaments. That’s why these things should always, always start with conversations.
Topic Two – Who’s Buying?
CB: That’s grand, thanks, and I think the perfect time to move into our second topic, which is the issue of who is actually using products made by arms companies.
MH: Ah yes, this is a big one. I love (and I mean that sarcastically) the way that some are suggesting that investing in arms companies equals more products for our protection. Of course it might do, if (in our case) all the products made by BAE, for example, were bought by the British government or other NATO states, but this is hardly guaranteed.
CB: Go on?
MH: Well, let’s say that lots of money is suddenly channelled towards an arms company, and as a result of that the company is able to raise the capital to manufacture a whole bunch of drones. Between the US, the UK, and other NATO states, 70% of these are then purchased, but 30% are left. The company will then look for other buyers. They’re a business, after all.
CB: Meaning that some products may end up being bought by others?
MH: It’s certainly a possibility. Going back to the drone example, at best you might just see these being sold to countries that would not come to our aid in some form of conflict, but at worst you might even see some sold to oppressive regimes, and then used in a way that abuses human rights.
CB: Which, without wanting to state the obvious, would be an issue for most investors.
MH: Almost certainly. All of a sudden money belonging to a human rights charity, for example, has indirectly helped to provide drones to a regime that goes against its very principles. This is why we in the industry have to be very careful. Investors may have the best of intentions in wanting to protect their families and their country, but simply channelling money towards arms companies won’t necessarily guarantee that.
Conclusion:
CB: So, in summary, and going back to our first question what should managers be doing?
MH: Talk to clients, understand how they feel, and stick to their guns. Pun intended.
CB: By which you mean not abandon their exclusionary policies?
MH: Exactly that. They should find opportunities for clients that aren’t entirely opposed of course, but it is important to keep options for avoidance available. After all, there will always be those who want to avoid links to weapons, and their views should be respected. If they’re not, they will likely just move their money to a manager who will.