Defending the defensible: is the defence sector sustainable?

Defending the defensible: is the defence sector allianzgi.com sustainable? October 2022 Ukraine’s legitimate right to defend itself against Russian armed forces demonstrates the importance of an effective and well-funded military. Recent events have sparked questions about the role of defence companies in sustainable investment portfolios and the long-standing exclusions applied to these investments. Is there room for a more nuanced view of the sector, particularly as it evolves and defence spending rises? Guirec Thouement Sustainability Key takeaways Analyst – War in Europe has drawn attention to the relevance of the aerospace & defence (A&D) sector in portfolios, where typically these stocks have been totally or partially excluded – Allianz Global Investors’ approach is to exclude controversial weapons across all portfolios, but an additional restriction of a 10% threshold of investee revenues generated from weapons, military equipment and services is applied to sustainable portfolios – With perceptions of defence changing in the light of recent events, and spending set to rise, some investors are asking whether a more nuanced approach to the sector is possible – Engagement with defence companies could form part of an alternative approach, but may not be a definitive answer The Ukraine war has brought a significant focus Typically, defence stocks have been subject to on the aerospace and defence (A&D) sector and whole or partial exclusion from portfolios for contributed to record outperformance by the investors with sustainability preferences. Now as 1 sector this year. In February 2022 – the month in the war in Ukraine continues there are questions which Russian forces renewed Ukraine hostilities around the positioning of the sector. Meanwhile –the EU Commission published its Final Report heightened concerns over national and regional on Social Taxonomy, which sets out to define security and the “legitimate” use of military what constitutes a “social investment”. This equipment are sparking a review of the use of document notably omitted a previous description exclusions and whether other approaches could of the defence industry as “socially harmful”. be appropriate. Value. Shared.