Since Russia’s 2022 invasion of Ukraine and through the end of the fourth quarter of last year, the share of sustainable funds in Europe that devote at least 1% of their portfolios to aerospace and defense stocks has climbed by 37% for actively managed funds and 67% for passive products, according to data compiled by Morningstar Direct for Bloomberg.
The development marks a stunning about-face for a corner of the fund market that long treated such assets as uninvestable.
“Many ESG investors, five to 10 years ago, if you had a fund manager in the room who said, ‘Do you buy defense stocks?’ It would be laughable,” said James Penny, UK chief investment officer at TAM Asset Management Ltd. Now, they’re doing investments they “would’ve never done” before, he said.
For ESG (environmental, social and governance) investors battered by years of below-average returns, it’s an opportunity to tap into an asset class that’s outperforming the market by a wide margin. Since February 2022, the S&P Global 1200 Aerospace & Defense Index has added about 70%. By comparison, the Stoxx Europe 600 Index is up roughly 25%, while the S&P Global Clean Energy Transition Index has lost more than a third of its value in the same period.
According to data compiled by Bloomberg, Rheinmetall AG currently sits in more than 680 ESG-registered funds. Leonardo SpA is held in some 485 ESG funds, and there are roughly 375 such funds that hold Lockheed Martin Corp. About 465 ESG funds own shares of BAE Systems Plc, the data show.