ESG funds in Europe increasingly invest in defense stocks

Fund managers responsible for ESG (environmental, social, and governance) investments are changing their strategies to include defense stocks. They have faced years of poor returns and are now looking for profitable opportunities. Since the start of Russia's war in Ukraine in 2022, more sustainable funds in Europe have started investing in defense. Data shows that the number of actively managed ESG funds investing at least 1% in defense stocks has increased by 37%. For passive funds, the increase is even higher at 67%. This marks a significant shift for ESG funds, which previously shunned such investments. Defense stocks have performed well, with the S&P Global 1200 Aerospace & Defense Index rising about 70% since February 2022. In comparison, the broader European market has gained around 25%, while clean energy indices have declined. Several well-known defense manufacturers, like Rheinmetall and Leonardo, have seen their stock prices skyrocket. Rheinmetall's shares are up over 1,300%, while Leonardo's shares have increased by more than 600%. This strong performance is attracting more ESG investors to the defense sector. Investors and regulators in Europe are also easing rules to encourage investment in defense. European officials are looking for ways to increase private funding for defense, given recent geopolitical threats. The EU aims to provide support for capital investment in these sectors. Some investment managers are re-evaluating their ESG policies in light of these security challenges. They are moving away from strict moral objections to defense investments and recognize the importance of supporting national security. Even firms that previously avoided defense investments are now reconsidering their stances. The performance potential in the defense sector is seen as a key motivating factor for these changes. The shift in narrative suggests that many will find ways to justify investing in defense assets.