05 Sep War and ESG
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
ESG Favors Some Freedom Fighters over Others
Over the past week, two major financial news outlets addressed the fascinating and controversial issue of weapons companies in ESG portfolios – in Europe, especially. On Monday (September 2) CNBC noted the following:
Defense stocks have typically been excluded from portfolios based on environmental, social and governance (ESG) factors due to ethical concerns over their association with warfare.
In recent months, however, ESG fund managers appear to have become increasingly comfortable with holding defense companies — at a time of soaring industry profits and higher defense spending, as governments respond to elevated geopolitical risk.
Only a day before, The Financial Times put some meat on those bones, providing the numbers associated with this “increasing comfort”:
The value of European sustainable investment funds’ exposure to defence stocks has more than doubled since Russia’s invasion of Ukraine, as policymakers push the need for a strong defence industrial base.
About a third of funds in Europe and the UK focused on environmental, social and governance issues now have €7.7bn invested in the sector, compared with €3.2bn in the first quarter of 2022, according to an analysis for the Financial Times by Morningstar Direct.
Although the rise in value is in part due to the share prices of defence companies soaring since Moscow’s full-scale attack on Ukraine in February 2022, many investors have also bought into the argument from governments that backing arms makers, long the subject of boycotts and student protests, should carry positive social connotations rather than exclusively downside risk.
None of this should surprise anyone, of course. The mutability of the definition of ESG has always been a significant issue, and the question of armaments suppliers’ compatibility with “sustainable” investing was one of the first major financial controversies resulting from Russia’s invasion of Ukraine more than 2 ½ years ago. Although supporters of ESG might phrase it somewhat differently, the conclusion reached in the wake of that invasion was, essentially, that ESG is “whatever we say it is,” and therefore, is compatible with whatever investments we choose. After all, you can’t save the world from its greatest security risk – i.e. climate change – if you can’t first deal with other, less serious risks, like nuclear-armed, power-mad, territory-hungry dictators.
Broadly speaking, this declaration was also an admission of a charge at the heart of ESG detractors’ case against the investment strategy. By conceding that the definition of sustainability can be changed to fit geo-political circumstances, the forces driving the ESG debate also conceded that the whole process is politically animated. In this case, the reflexive effort to redefine the nature of sustainable investments essentially proves that political calculations very much drive investment classifications. Either the prior rejection of the manufacture of weapons was or its present acceptance is animated by purely ideological considerations. Objectively, the sustainability of weapons doesn’t suddenly change because investors decide they like or dislike those who happen to be using them. That is an emotive and, therefore, non-rational, non-pecuniary evaluative process.
Unfortunately, as the war in Ukraine drags on and as war-related events elsewhere in the world produce daily headlines, this broad concession of political incentives in ESG/sustainability calculations is already giving way to more specific instances of ideological bias. These, in turn, mask less socially acceptable biases and, as a result, demonstrate the fraudulence of the ESG movement and expose some of its more profound long-term risks. CNBC addresses this somewhat delicate matter thusly:
“Traditionally, ESG investors and especially retail investors do not want to be associated with companies that produce weapons,” Ida Kassa Johannesen, head of commercial ESG at Saxo Bank, told CNBC via videoconference.
“Ultimately, [these are] companies that cause the death of people [and] innocent victims in the Middle East at the moment, in wars waged in Africa, for example in [the Democratic Republic of the] Congo, and a few other places in the world. Retail investors just do not want to have anything to do with these types of companies.”
And what, pray tell, is happening in the Middle East, “at the moment”? Again, FT puts meat on CNBC’s bones:
David Coombs, head of multi-asset investments at Rathbones, said that while the UK-based manager had not added defence stocks to its sustainable funds, it considered “ESG risk” as part of a general risk analysis across all its funds.
For example, Rathbones has held Lockheed Martin since 2016, over which time the stock’s ESG risk has continually fallen according to its analysis.
But exposure to defence can cut both ways. “You’ve got defence stocks that might be selling to the Israeli military. [There, the] ESG risk is super high,” Coombs added.
That’s not exactly subtle, is it? Lockheed, which is indirectly supplying the Ukrainian resistance to Russia, is just fine. No problems there. But don’t you dare try to invest in companies that might be complicit in helping Israel defend itself against Iran and the countless proxy terrorist organizations that practically encircle it! That would be totally unacceptable.
Likewise, Ida Kassa Johannesen, “head of commercial ESG at Saxo Bank,” seems convinced that the onus for the war between Israel and Hamas/Hezbollah/Houthis/Iran falls squarely on the shoulders of the Israelis. The Iranians and their proxies don’t buy weapons from publicly traded Western companies, after all. When Johannesen talks about an aversion to investing in companies selling weapons to those who are causing the death of “innocent victims” in the Middle East, she is exposing her biases: she is “anti-Zionist”/anti-Israel at a bare minimum. So, for that matter, is David Coombs at Rathbones. And so, I’d guess, are the overwhelming majority of the ESG advocates throughout Europe and probably the United States.
It has always been the case that ESG is a tool of the political Left, a definitionally pliable investment strategy designed to advance whatever policy propositions political activists deem critical at any given moment. The rise in defense-stock investment – and the selectivity of that rise – demonstrate conclusively that the whole process is grievously flawed and, if left to its own devices, will enable serious geo-political chaos.
