CEO of Swedish defense and security company Saab, Micael Johansson, speaks during the presentation of Saab's interim report in Stockholm on February 9, 2024.
Jessica Gow | Afp | Getty Images
Russia's ongoing war in Ukraine has led to a profound change in the way mission-oriented fund managers view defense stocks, according to two European defense giants.
Defense stocks have typically been excluded from portfolios based on environmental, social and governance (ESG) factors due to ethical concerns about their connection to warfare.
In recent months, however, ESG fund managers seem increasingly comfortable with holdings in defense companies at a time when industry profits are soaring and defense spending is rising as governments respond to increased geopolitical risks.
Nevertheless, the inclusion of defense stocks in sustainability-oriented portfolios remains controversial.
Micael Johansson, CEO of Swedish defense and security company Saab, said Russia's decision to launch a large-scale invasion of Ukraine in February 2022 had brought about a “dramatic” turn in the ESG debate.
“I think we had 45,000 to 50,000 shareholders before this tragic war broke out, and now we have, How, over 175,000 shareholders. Of course, the interest in investing in us is completely different now, but there is still some reluctance in the market,” Johansson told CNBC's Silvia Amaro on August 21.
It is really important that we recognize the role that defense contractors play in protecting a free society.
Brad Greve
Chief Financial Officer at BAE Systems
Johansson said some pension funds, for example, are still unwilling to invest in shares from the defense sector. In addition, there is no sudden “all-in” approach to recognizing defense companies as sustainable companies.
“Not everyone sees it that way. More needs to be done in this area, which really frustrates me… because if you don’t have security and a deterrent,, then you can't talk about ESG from other perspectives. In my view, that is the foundation of sustainability,” said Johansson.
Shares in missile, submarine and fighter aircraft manufacturer Saab have skyrocketed since the start of the war between Russia and Ukraine – by around 330 percent between February 20, 2022 and August 29, 2024.
“I have no problem with our reputation”
“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 video conference.
“Ultimately, [these are] Companies that cause people’s deaths [and] innocent victims in the Middle East, in the wars in Africa, for example in [the Democratic Republic of the] Congo and some other places in the world. Private investors simply don't want to have anything to do with such companies.”
For this reason, according to Johannesen, fund managers are generally reluctant to include certain defense stocks in their portfolios in order to avoid questions from their clients.
A pro-Palestinian supporter gestures while looking at his reflection in a window during a demonstration marking the “Day of Action for Palestine” in front of British multinational defense, security and aerospace company BAE Systems in London, January 20, 2024.
Justin Tallis | Afp | Getty Images
When asked if defence companies need to do more to improve their reputation, Saab's Johansson replied: “Maybe, I don't know. I don't think I would have worked for this company for 39 years if I hadn't been so committed to what we do, what we actually stand for and what we contribute in terms of resilience and great capabilities.”
Johansson said that when politicians recognize a threat situation, it is imperative to have “professional” and “serious” companies capable of providing the necessary resources to the defense forces.
“So we stand for something really important – and I have no problem with our reputation. I don't know what it's like for others,” he added.
“Big villains” vs. “not so bad” companies
ESG investing has become a polarizing political issue in recent years, particularly in the United States
Republican lawmakers call earmarked investments a form of “woke capitalism” that prioritizes liberal goals over financial returns.
Democratic lawmakers are trying to fight back, calling the attacks on a range of ethical business practices “an attempt to start a culture war and protect corporate special interests,” according to the Democrats' Committee on Oversight and Accountability.
Analysts expect the outcome of the U.S. presidential election in November to determine whether the political backlash against ESG will have profound and lasting effects.
A T-650, an all-electric heavy-lift unmanned aircraft system (UAS), developed by Malloy Aeronautics, is displayed on the British Aerospace BAE Systems hall during the Farnborough International Airshow 2024 at the Farnborough International Exhibition and Conference Centre on July 22, 2024 in Farnborough, England. The Farnborough International Airshow 2024 will host leading innovators from the aerospace, aviation and defense industries.
John Keeble | News from Getty Images | Getty Images
“Before the Ukraine conflict, you couldn't even have these talks because even though you might be doing great things in the east, south and south, you couldn't even talk about it,” said Brad Greve, chief financial officer of the British arms company BAE Systemssaid CNBC in an interview on August 14.
“Since the incident in Ukraine, attitudes have really changed. I think people have now started to think. It's really important that we recognise the role that defence contractors play in protecting a free society,” he said.
Greve noted that while fund managers always have the right to invest at their own discretion, “the good thing from my point of view is that we can now have these conversations about the positive role we play in society.”
Shares of BAE Systems, which makes nuclear-powered submarines and fighter jets and supplies munitions, rose about 130% between February 20, 2022, and August 29, 2024.
Stock chart symbolStock chart symbol
BAE Systems stock performance as of February 20, 2022.
Saxo Bank's Johannesen said that while the ongoing war between Russia and Ukraine has fuelled the ESG debate, most fund managers remain “quite cautious” about investing in the defence sector.
“Should we all [defense companies] in the same pot? The truth is, it's a mix. It's really a mix of different types of companies. There are big villains and then there are those that, I would say, are not so bad,” Johannesen said.
“It's not easy to say you're a villain because you make weapons. That's not for me to decide, and I don't think private investors should do that for everyone else. They should decide for themselves – but they shouldn't, for example, try to demonize all the companies that make weapons,” she added.
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