As geopolitical tensions intensify, professionals are examining the implications of new defense-related ETFs for investors who prioritize ethical considerations in their portfolios.
This week, Global X and Betashares launched their respective defense-related ETFs. Global revenues from the defense sector.
VanEck was notably the first to enter this space with its own defense ETF (ASX: DFND) in September, highlighting the growing importance of the sector amid global instability. But despite investor interest, some remain hesitant due to potential conflicts with their ESG values.
Estelle Parker, co-chief executive of the Responsible Investment Association Australasia (RIAA), highlighted that while 55% of Australians prefer to avoid investments in arms, ethical investing is nuanced.
“Investing responsibly and ethically means different things to different people,” Parker said.
“Some may want to avoid investing in controversial weapons like landmines or cluster munitions, but for them, weapons used in the defense of countries like Ukraine may be acceptable, while others may want to avoid guns altogether. »
The increase in defense ETFs correlates with global military spending, which jumped 7% to $2.43 trillion in 2023 – the biggest increase since 2009 – and could reach $3.1 trillion by 2030. according to the Stockholm International Peace Research Institute (SIPRI). .
Amid this interest, Parker highlighted the growing demand for ethical financial products, noting that 88% of Australians expect their investments to be responsible and ethical, up from 83% in 2022.
“In fact, 65% of them would invest more if their investments had a positive impact on the world. Furthermore, the growth in global financial flows towards ESG and long-term sustainable investments is a clear signal that the movement is not waning but evolving,” Parker said.
As such, she emphasized that “more than ever, retail investors and consumers must work with their advisors and funds to carefully review their investments to ensure they align with their values.”
Parker also urged fund managers offering defense ETFs to “clearly and consistently communicate” the criteria they employ, including materiality thresholds and the types of weapons included or excluded, while providing methodologies and transparent assumptions.
According to her, this clarity allows investors to make informed choices.
But regardless of the strategy used, Parker said “all financial institutions must manage human rights risks preemptively.”
Hugh Harley, former head of financial services at PwC and professor at the University of Sydney, acknowledged that geopolitical tensions have led to increased defense spending, and therefore increased investment interest in the sector.
These factors include strong demand prospects as governments continue rearmament, advantageous positions held by key industry players dominating the market, and growing competitive tensions between national governments.
“On the other hand, there are many corruption and reputational risks in supply chains. [as well]” Harley said.
Ultimately, he emphasized that ESG in defense investments has various ethical implications, emphasizing that governance is crucial.
“In particular, precisely because of the supply chain and reputational risks of defense industries, the governance dimension becomes absolutely paramount for any qualified investor,” Harley said.
“By definition, risk management is at the heart of this investment category,” he said. “Only time will tell if the returns match the risks. »
Harley also warned that the gradual disintegration of global frameworks would likely hamper ESG cooperation efforts.
“The headwinds we see for ESG as a global category share the same root cause as increased defense investment: rising geopolitical tensions and the fragmentation of post-war global institutions and norms. World War II,” he said.
“It’s hard to see this situation reversing any time soon.” »
