Defence companies are still viewed by some as supervillains – incredibly, given the new world disorder in which we now live. There’s the growing threat from Russian aggression, and a US administration keen to offload its role as a global policeman.
And yet several of our largest pension funds have this week doubled down on restricting their investment in Britain’s defence sector on supposedly ethical grounds.
Aviva, Royal London and the National Employment Savings Trust, the workplace pension scheme set up by the government, have refused to support a homegrown industry valued in excess of £53 billion.
Chancellor Rachel Reeves, who last month signalled her intention to "fire up" our defence sector, believes current investing rules deny it billions in funding, and that companies involved with national security ought to be routinely regarded as “ethical”.
Former defence minister Lord Heseltine reminded the Telegraph that “defence is an ethical issue”, and that excluding investments in armament companies on the grounds of ESG – industry shorthand for “environmental, social and governance”, a set of standards that socially conscious investors use to screen investments – was “ill-judged”, and “does not reflect the interests of their pensioners”.
Whether or not defence stocks are considered “ethical” or “sustainable” should matter to us all. According to data from investment researcher Morningstar, roughly a quarter of the £1tn invested in UK domiciled investment funds by either pensions (the lion’s share) or individuals is in the sustainable sector.
People need to grow up. Right now, defence stocks are hotter than Scotch Bonnet chilli peppers: the likes of Rolls-Royce, a global player in building and maintaining military transport, and BAE Systems, which manufactures fighter jets, tanks and ships as well as guns and ammunition, are adding some much-needed sparkle to the FTSE 100. Meanwhile, Babcock, currently in the second-tier FTSE 250, is knocking on the door of a promotion. The funds invested in these companies would be foolish in the extreme to kill off this fattening golden goose.
I’m not opposed to ethical investing. Far from it; I invest in ethical funds. Arms companies have traditionally been frowned upon by the sector. But the hard fact is that the world has changed, and not for the better.
First, Russia sent its tanks and drones and missiles into Ukraine. Then Donald Trump made it very clear that Europe can not rely on America’s massive military to ride to the rescue if Putin decides to extend his ambitions to, say, the Baltic states, all of which are Nato members. There are also worries about him sabotaging undersea cables, for example, and indulging in other types of destructive mischief.
This unpleasant new reality has prompted more than 100 Labour MPs and peers to sign an open letter arguing that the ESG policies of some of the banks, fund managers and – ding ding ding! – pension funds are holding back defence spending.
The letter, backed by Labour’s Growth Group in Parliament, urged financial institutions to “sweep away ill-considered anti-defence rules”.
Some would be appalled at this, given that their products kill people. But consider that a clear majority of Britons would see backing Ukraine’s cause as completely just. They would probably see providing the country with the produce of Britain’s homegrown defence industry so it can defend itself as not just ethical but a moral imperative.
What’s that you say? Your problem is not defending the nation, but where else the arms are being exported? Well, it is down to the government to grant export licences. So by all means take to the streets if it ever greenlights the sale of tanks to countries that would use them to fire on their own people.
But don’t forget that pension funds are large investors, with votes that they can use to express their disapproval if the businesses whose shares they hold behave in ways they or their members dislike.
This is actually a far more worthwhile tool in the “ethical” investor’s armoury than merely disinvesting.
Follow This, a campaigning group, has, for example, been pressuring oil majors to clean up their acts. BP abandoning its climate transition strategy is certainly a setback, but as it recently opined, “shareholders hold the key” to forcing a rethink. Expect the oil and gas multinational to face climate resolutions at forthcoming AGMs sponsored by the group, and for the company to be grappling with the negative votes – and negative PR – unless and until it changes tack. For those who object to investment in arms companies, there’s your model for how best to protest.
Here’s another point to consider: pension funds in the public sector have fiduciary responsibilities to taxpayers if they offer guaranteed retirement incomes to their members. Local authority schemes typically do that. This boom in the defence sector is not something they should be missing out on. To the contrary – they should be piling in. All our pension schemes should be piling in. It is the right thing to do financially and, yes, ethically.
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