Stockholm (NordSIP) – The tumult brought about by the Russian invasion of Ukraine, followed by Donald Trump’s affinity for Putin and dithering about the future of NATO, has undermined the geopolitical foundations upon which Europe’s peaceful political and economic status quo stood. Understanding that it once again faced a violent neighbour while realising that its American ally no longer stood shoulder to shoulder with it, Europe has had to develop accelerated rearmament programmes. The Nordics, who share several borders with Russia, were no exception. If anything, they are quickly becoming the example to follow.
Sustainable finance, due to its genesis as ethical investing, has always resisted investing in the defence industry. When sustainable investing was mainstreamed into most asset owners and asset managers in Europe at the end of the 2010s and during the pandemic, the industry onboarded defence exclusions too. Now, change is afoot.
According to a recent announcement by Varma, the Finnish pension company updated its Principles for Responsible Investment regarding the defence sector to facilitate investments in the defence industry. In the announcement, Varma highlights a geographical focus on considering investments in defence companies from alied countries and the financial benefits of participating in a growing technological market whose supply chain is increasingly difficult to disentangle from the civilian tech economy. The updated Principles for Responsible Investment now propose a more open approach, where Varma will even consider investments in companies involved in controversial weapons if they are headquartered in allied countries.
The Defence Industry’s Interconnectedness
Varma’s first point was to highlight the financial relevance of the defence industry, noting that it “is expanding and driving the development of new business models.”
“The sector is making major technological leaps. Companies that previously had no connections to defence technology will benefit from the sector’s transformation. By updating our principles, we ensure that we can be involved in this development as an investor,” says Varma’s Deputy CEO Markus Aho.
Highlighting interconnectedness of the defence industry, Varma further noted that “products or services for the armed forces of different countries are often produced by companies in many other sectors, such as manufacturers of vehicles, aircraft, engines and turbines. The defence sector is also closely linked to companies operating in the logistics, infrastructure, telecommunications and technology sectors.”
The Old Policy
Varma’s Principles for Responsible Investment policy is divided into five parts: “Integrating responsibility into the investment process”, “Environmental risks and opportunities”, “Engagement and active ownership”, “Negative screening and due diligence” and “Taxes”. It would seem that the most prominent changes occurred in the section that focuses on “Negative screening and due diligence” with this last update.
Pior to the update, Varma’s exclusions for controversial weapons were general. “For ethical reasons, Varma has excluded the following from its direct investments (…) companies producing controversial weapons (such as nuclear weapons, anti-personnel mines, cluster bombs, chemical and biological weapons, etc.),” the previous policy noted.
There were two exceptions to this rule, but these too were relatively general. “As an exception to the general rule, the company will be subject to due diligence if:
- the company’s activities related to controversial weapons do not account for a significant proportion (more than 5%) and the company’s main activities are related to conventional weapons or activities supporting them, and
- the main purpose of the weapons is to defend the sovereignty of states that have signed international arms control treaties and to prevent potential conflicts.”
Sorting the Wheat from the Chaff
The new exclusions policy has been simplified to not investing in any controversial weapons company from non-allied countries, which it lists. “For ethical reasons, Varma has excluded the following from its direct investments (…) companies with a verified involvement to controversial weapons (such as nuclear weapons, landmines, cluster bombs and chemical and biological weapons) and not headquartered in NATO countries, the Indo-Pacific Four (Japan, South Korea, Australia and New Zealand), or Switzerland.” (emphasis added)
This specific clarification of the geographical headquarters of controversial weapons companies to be excluded has to be made because Varma has decided to, at least, consider investing in some controversial weapons manufacturers, namely those from allied countries.
In the updated principles, the Finnish pension provider notes that “Varma has defined industries that require the due diligence process. The due diligence process concerns the following industries:
- (…)
- Defence sector
- Companies with a verified involvement to controversial weapons and headquartered in NATO countries, the Indo-Pacific Four (Japan, South Korea, Australia and New Zealand), or Switzerland.”
