In This Article:
Investing in defence is unethical because weapons made by the industry might end up in the hands of Britain’s enemies, one of the City’s leading executives has said.
Barry O’Dwyer, chief executive of asset manager Royal London, said the company would continue to exclude weapons firms from its range of sustainable funds because its advisers had concerns about “arming the other side”.
An external committee made up of Royal London customers and environmental, social and governance (ESG) advisers had reviewed the ethical-funds ban on defence stocks two years ago and decided to maintain it, Mr O’Dwyer said.
“It’s a nuanced argument, because I don’t think anybody would argue against defence,” he said. “But when you change it into armaments, then it becomes slightly more tricky – because how do you invest in armaments and ensure that they’re only used for defence?
“[The debate from the committee is] if we do invest in armaments, how do we ensure that we’re not just arming the other side or arming people that we wouldn’t be comfortable with?”
Like many pension funds, Royal London has ploughed some of its £173bn of customer savings into defence groups such as BAE Systems and Raytheon.
However, it excludes such arms manufacturers from ESG funds worth £2.5bn, which restrict financing for weapons makers alongside tobacco producers and nuclear-power generators.
The financial sector’s attitude to arms manufacturers has rocketed to the top of the political agenda after Sir Keir Starmer pledged to raise Britain’s spending on defence from 2.5pc of GDP to 3pc over the next decade.
More than 100 MPs and peers signed an open letter this week urging Britain’s finance industry to “sweep away ill-considered anti-defence rules”.
“We must rethink ESG mechanisms that often wrongly exclude all defence investment as ‘unethical’,” the letter said, referring to the defence of Ukraine from Russian aggression.
Policymakers are also considering plans to rewrite a voluntary investment code, known as the Mansion House Compact, to encourage more defence spending from pension funds.
Mr O’Dwyer said that it may be unnecessary to force ethical funds to include defence in their portfolio of stocks because the “market fixes this itself”, with weapons makers likely to be added if there is enough demand.
He added that the ethical investment committee may reconsider its position in future.
“Obviously, the environment has changed and I would expect us to continually sort of review that position with the external advisors,” Mr O’Dwyer said.
Most ethical funds exclude the defence industry because many weapons makers also supply anti-democratic and dictatorial regimes alongside countries like the US and UK. However, defence companies are only allowed to work with British allies and cannot legally supply geopolitical adversaries such as Russia.