ESG in wartime: What is it good for?

Climate Finance

ESG in wartime: What is it good for?

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The grim fact of war in Ukraine war has raised new questions. 

Questions about ESG’s validity as an investment strategy have been increasing in recent months, rising in tandem with its spreading popularity and record inflows into ESG funds.

These serious concerns have been perfectly predictable, given that this is a revolutionary financial approach to investing combined with a very short track record. Many of those concerns have been raised by asset managers, financial advisors and analysts themselves, to better their practice as practitioners.

These issues are well-known, complex and will not be easily or quickly resolved. But thoughtful initiatives are underway to find solutions to harmonize the multiplicity of frameworks and standards, ratings and rankings; to move away from an individual, single-company focus to sector-wide guidelines; to install mandated rather than voluntary disclosures; and to provide sufficient rules of the game, governed by top-level regulators such as the U.S. Securities and Exchange Commission.

Now, however, the grim fact of the Ukraine-Russia war has raised new questions, voiced by some ESG detractors who are calling out the entire concept with hot-button rhetoric in a heightened atmosphere of crisis.

For example, some point to the issue of whether weapons manufacturers deserve consideration within the space of ESG values investing. Jan Pie, secretary-general of the Aerospace and Defense Industries Association of Europe, has asserted, “If you don’t have security and stability, if you can’t defend the open values of democracies, you cannot have any kind of sustainability. Unfortunately, I think there is evidence of that going on in Ukraine as we speak.”

If you don’t have security and stability, if you can’t defend the open values of democracies, you cannot have any kind of sustainability.

The background to this broad statement is not a neutral one. Pie’s claim is pointed at European Union regulators, as part of a push to include the European defense industry as a “socially beneficial activity” in the EU’s forthcoming taxonomy of which green funds will qualify under mandated sustainable investing rules. As of this writing, draft proposals by the Platform on Sustainable Finance do not yet include weapons manufacturers. According to Pie, the EU is “contradicting itself on its top-level strategic priorities” by preparing rules that would discriminate against the defense industry while stepping up overall EU military spending.

Pie’s lobbying comes as the EU is funding arms purchases for the first time in its history. (It should be noted that even if weapons manufacturers are included as “socially beneficial” under the final taxonomy, no investor is obligated to invest in them just because they align with the official definition of sustainable investing.)

However, speaking of “evidence,” there doesn’t seem to be any universal stricture against military manufacturers in sustainable funds, according to Morningstar Direct. The investment analysis platform finds that “only one in four (23%) of sustainability funds globally have a stated policy of excluding military contractors. What’s more, 44% of sustainable funds already have some exposure to military contractors in their most recent portfolios.” For reference, 60% of other funds have some exposure to military producers, says Morningstar.

The analysis further notes that “rather than outright exclusion of military contractors, most sustainable funds subject them to the same kind of ESG risk analysis that they use for other companies. As you might guess, military contractors tend to have high ESG risk assessments, which contributes to exposure being somewhat lower among sustainable funds than other funds.” The bottom line from this analysis: “Sustainable investing is not an anti-defense industry monolith.”

Also noted is the fact that “most funds have very small exposures to this industry, as many military contractors are large companies with other lines of business.”

However, ESG funds are still exposed, reports Denise Young in “War & the ESG Existential Crisis,” in The Zeroist newsletter.

“More than half of funds classified as sustainable by research firm Morningstar contain a total of $7.3 billion of exposure to military weapons, according to Capital Monitor analysis of shareholder advocacy group As You Sow’s database.”

“More than half of funds classified as sustainable by research firm Morningstar contain a total of $7.3 billion of exposure to military weapons.”

The larger, ethical question is what kind of “socially beneficial activity” is the financial support of companies producing anti-tank missiles, drones and assault rifles? And how are these weapons different in kind or degree from anti-personnel mines and chemical/biological devices?

At least one aspect of this debate is clear: The latter are proscribed by the United Nations Convention on Certain Conventional Weapons, put forth in 1983, which “seeks to prohibit or restrict the use of certain conventional weapons which are considered excessively injurious or whose effects are indiscriminate.” Ironically, a 2010 update, the Convention on Cluster Munitions, has been signed on to by more than 100 countries — but not the U.S. or Russia.

But can military weapons be neutral, considering their purpose, with “good” values to be ascribed to those of democracies and “bad” tags affixed to those of totalitarian armies? What’s the moral position (or positions) to be taken in coming to the aid of a country suffering what appears to be genocide-like aggression with killing devices to fight those using similar devices?

Coming at the issue of ESG in wartime from another angle, Russian Prime Minister Vladimir Putin has adopted a predictably cynical stance, arguing that the West’s advocacy for renewable energy is just another example of hypocrisy and general hostility to all things Russian.

In a recent “industry-specific” meeting with ministers from the country’s oil and gas sector, Putin said environmental concerns over fossil fuels have “been thrown on the scrap heap.” He claims that Europe’s admission of European dependency on Russian oil and natural gas is a confession of its own miscalculations and that continuing to source fossil fuel energy proves the error: “European countries are ready to abandon the so-called green agenda and resume their reliance on energy with a so-called high carbon footprint, which, until recently they wanted to shut down completely as out-of-date and dirty. Many political forces used environmental slogans in their election campaigns. Where is all of this now?”

Putin could have been referencing such headlines as “Biden and Ukraine: from climate champion to oil price panic,” in which the Financial Times reports on the administration’s “policy contortions” as it shifts focus 180 degrees from renewable energy policies to locating new sources of petro-energy to replace Russian supplies for its European allies.

Murky definitions, conflicting purposes — ESG and sustainable investing have been there before and will be for some time. Still, directing funding toward values-driven investments, especially those with climate- and energy-related issues, is the prevailing conventional wisdom in the global finance sector and increasingly, among policymakers. Those clamoring for more support for renewables have ramped up their sense of urgency toward making faster progress on the transition to a clean energy economy. The ongoing war, with its global alarms about energy sourcing and security, is forcing the pace in finding solutions to some hard problems.  

This article originally appeared on as part of our partnership with GreenBiz Group, a media and events company that accelerates the just transition to a clean economy.


Written by

John Howell

John Howell is a writer, editor, and broadcaster who oversees the Climate Finance Weekly newsletter and advises on communications and media strategy. He was co-founder, editorial director, and chief of thought leadership for 3BL Media, for which he managed all original editorial content, wrote, and edited newsletters, and created the Brands Taking Stands initiative. He has worked as an editor and contributor for Elle, Artforum, and High Times magazines, developed new media for Hearst Magazines, and created communications for Calvin Klein, Polo/Ralph Lauren, and The Body Shop. He lives and works in New Hampshire and Maine.