Fund managers bring defence investments in from the cold

European asset managers are repositioning themselves to invest heavily in the continent’s rearmament. According to data compiled for The Observer by Morningstar, 1,210 European funds managing more than €790bn in assets have dropped exclusion criteria for companies that produce, sell or distribute “personal weapons and small arms” within the last year. More than 700 funds with €540bn in assets under management have ended exclusions for “military contractors” during the same period.

“Five years ago we had sustainable funds saying, ‘No, you can’t buy munitions,’” says Patrick Thomson, chief executive of Europe, Middle East and Africa at JP Morgan Asset Management (JPMAM). “I think that debate has changed, and Europe is fully in on defence as an absolutely critical social mission.”

In April the banking arm of JP Morgan announced an expansion into Europe of its 10-year $1.5tn Security and Resiliency Initiative; a lending programme targeting defence, energy and strategic technology across the UK and EU. Soon after, JPMAM dropped small-arms exclusions for 30 of its exchange-traded funds, managing nearly €40bn of assets. “We are a fiduciary, and we invest along the guidelines that clients tell us,” says Thomson.

The shift extends beyond just so-called “conventional weapons”. The Morningstar data shows that 257 funds managing about €160bn (which did not include any JPMAM funds) have dropped exclusions on “controversial weapons” – defined as deriving “significant revenue from weapons judged to cause severe, disproportionate, and indiscriminate impact on civilian populations”. Examples may include anti-personnel landmines, cluster munitions, and biological, chemical and nuclear weapons.

Analysts say this switch may be linked to decisions by several countries on Nato’s eastern flank, including Poland, Lithuania, Latvia, Estonia and Finland, to withdraw from the Ottawa Convention – a 1997 treaty that bans the production and use of anti-personnel landmines.

Other investors have not been so nimble. Norges Bank Investment Management (NBIM), the world’s largest asset owner, made a notable admission in its latest annual report, saying “it is mainly the exclusion of weapons manufacturers that has reduced returns”.

Last year the Norwegian parliament commissioned a review into the sovereign wealth fund’s ethical guidelines to better align with national interests. Big defence names such as BAE Systems (up 60% year-to-date), Lockheed Martin (up 6% YTD) and Safran (up 11% YTD) are currently deemed off limits.

Danish pension fund PFA ended exclusions for large European arms manufacturers after the invasion of Ukraine in 2022 and told the website Investment and Pensions Europe that its defence investments returned 371% in the following 34 months. Sweden’s KPA Pension has also lifted a blanket ban on defence-related companies it had since the 1990s.

But some UK funds have moved in the other direction. After a review by its ethics committee last year, the Church of England’s £3.2bn pension fund tightened its investing rules to exclude firms generating more than 5% of returns from defence, down from 10%. In March the considerably smaller pension fund of north-east London borough council Waltham Forest divested from defence completely.

“Look at the debate we’re having in this country – it wouldn’t surprise me if you get more and more trustees of pension funds in the UK asking, ‘What’s our policy on investing in defence? Do we need to amend it?’” says Thomson, who stressed that decisions around defence allocations ultimately sit with asset owners.

Changes are also afoot elsewhere in the financial system. Nato allies gathering in Ankara last week launched a “call to action” to financial institutions to further increase private capital investment in defence and security. Major banks including Banco Santander, Barclays, BNP Paribas, Citi, Deutsche Bank and NatWest all signed up.

Photographs by Hussein Malla/AP