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    Has it been a year already? “The longest day of our lives,” as Ukrainian President Volodymyr Zelenskyy calls it. “We woke up early and haven’t slept since.” Twelve months of fierce battles, immense suffering, and staggering bravery. Thousands killed, and millions disrupted lives. Against all odds, Ukraine has held its ground. But so has Putin, seemingly unscathed by sanctions and reprimands. Alas, no sign of peace in sight.

    War in our immediate vicinity has certainly been a game-changer. Faced with its brutal reality, we have had to re-examine our somewhat naïve view of the world. Surely even the staunchest pacifist amongst us has, at some point during the past year, considered the moral imperative of taking arms against a sea of troubles. Weapon aversion seems to be a luxury reserved for safe and peaceful times.

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    Judging by the recent outperformance of defence stocks, at least, it would appear that most investors are not particularly squeamish about approaching the sector anyway. Betting on weapons does not seem to come with disproportionate moral qualms these days. Shares in defence companies have surged since October last year, rewarding investors with much higher returns than the broader market.

    So, what happened to those ESG-conscious investors that were rapidly disengaging from weapon manufacturers before the war? Some were quick to embrace the spirit of John Maynard Keynes, who might or might not have said, “When the facts change, I change my mind – what do you do, sir?” Just a year after banning defence investments across all their funds in February 2021, Swedish bank SEB was one of the first to take a U-turn, announcing they would indeed invest in the sector. Many others soon followed suit.

    One could argue, of course, that it is imprudent to take important ethical decisions like that under duress. It shouldn’t take a war nearby to make up or even change your mind on the age-old dilemma of whether it is justified to produce and sell weapons of mass destruction. Yet there we are. It is complicated.

    “My values conflict with each other in the context of the defence industry,” admits one expert in sustainable investing as we sip coffee in a cosy Stockholm parlour that feels utterly detached from the horrors of war. According to him, it’s not impossible or unthinkable to invest in defence stocks; it’s just so much tougher to make a credible investment case that doesn’t undermine key sustainable principles. Even if you agree with the moral premise of the industry’s necessity, there’s always the issue of these companies’ often poor corporate governance. The extensive due diligence and monitoring of such investments are simply too onerous, way beyond the powers of many investors.

    Once you’ve opened the door to investing in defence companies, however, it is indefensible not making the effort. The question is how many professional investors with sustainability ambitions are up to it. Take, for instance, Turkish arms company Aselsan, currently among the holdings of at least one of Sweden’s public pension funds. 74% of Aselsan’s shares belong to the Turkish Armed Forces Foundation, which is chaired by Erdogan. Should we question AP7 for owning shares1 in a weapons manufacturer controlled by someone that has been undermining democracy and human rights and is actively obstructing Sweden’s defence priorities? Or should we go along with the usual anti-divestment stance of Johan Florén who is adamant that divestments prevents responsible ownership?

     

    1. According to AP7’s website accessed on 24 February 2023, the AP7 equity fund currently holds 1,356,157 shares of Aselsan Elektronik Sanayi, estimated to be worth SEK 46,411,009 or 0.01% of the fund’s assets.

     

    Image courtesy of Maria Lysenko on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.
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