Ever since Russia launched its full-scale invasion into Ukraine, arms companies have ramped up lobbying efforts to be classified as a sustainable investment product. European government officials have also criticized defense sector exclusions on ESG grounds as threatening the industry’s access to finance, citing the need to defend ourselves in a shifting geopolitical landscape. The sector’s soaring profits tell a different story, however.
Early this year, then Dutch Minister of Defense Kajsa Ollongren expressed concerns about the capital needed to increase the defense sector’s production capacity, calling pension funds shunning the industry “part of the problem”. Previously she had warned that categorical exclusions of the arms industry will eventually undermine our ability to defend ourselves. In a similar vein, UK ministers referred to defense firms exclusions based on ESG considerations as “perverse” and convened major international asset managers with arms companies like BAE Systems and Leonardo to discuss capital allocation to the defense sector.
While this narrative may sound straightforward, it crucially fails to address the main reasons why many defense firms are excluded from investment portfolios: their involvement in the production of weapons of mass destruction and/or arms deals to oppressive regimes whose conduct undermines the very same democratic values that the industry claims to defend.
It also paints the inaccurate picture that the increased incorporating of ESG considerations in investment strategies is financially starving the defense industry. While some smaller defense enterprises may face some difficulties in accessing finance, Europe’s big defense firms are making record profits. French company Thales and Italy’s Leonardo, both excluded by some institutional investors for nuclear weapons involvement, saw their earnings sharply rise in 2024, with a 6.2 percent sales increase (to €14 billion) for Thales in the first nine months of this year and a 166.8 percent net result increase (to €555 million) for Leonardo for the first half of this year. Challenges faced by the defense sector around production capacity are rather connected to personnel shortage and supply chain constraints, as well as to lack of consistent and long-term government purchasing projects. In this context, it is difficult to comprehend the ongoing pressure on the private sector to pour money into the industry.
Large U.S. Defense firms have similarly seen their profits surge to record highs but have come under increased criticism for using remaining capital for stock buybacks to redirect cash flows to shareholders’ pockets rather than investing in research and development or production capacity . “[Y]ou can’t be asking the American taxpayer to make even greater public investments while you continue, in some cases, to goose your stock prices through stock buybacks, deferring promised capital investments, and other accounting maneuvers”, U.S. Navy Secretary Carlos del Toro has said. U.S. Senators have similarly urged UK defense firm BAE Systems to refrain from share buybacks “that divert capital away from important investments”. BAE concluded a buyback programme past summer that saw the purchase of 1,5 billion pounds, and has started a new buyback programme of the same size.
If the arms industry truly wants to contribute to sustainable development, it should act accordingly. Until then, investors seeking to foster corporate responsible behaviour are right to stay away.
Image credits: Scott Graham via Unsplash