Ida Johannesen, Head of ESG investments, Saxo Bank
Whether you are an investor or a trader, the need for superior returns is paramount. This reality may sound familiar to investors looking to invest in UAE stocks, and this also applies to ESG investors who are no strangers to seeking high returns.
ESG investors have long avoided certain industries like defence, mining, and oil and gas, opting instead for investments in sectors like healthcare and technology that are viewed as more ESG-friendly. Delving into their unique perspective sheds light on their stance.
ESG investors’ perspective
ESG investors consider ESG or environmental, social, and governance factors when making investment decisions and, as such, choose to avoid companies that are viewed as harmful to society or the environment. Defence companies, for example, produce missiles, bombs, ammunition, and, in some cases, banned weapons like anti-personnel mines. As a result, those companies are excluded from ESG investors’ portfolios as these investors don’t want to be associated with companies that destroy lives and harm civilians, companies that are considered non-ethical.
What are defence stocks?
Defence stocks are many things. Some companies are engaged in the production of ammunition, missiles, and bombs, while others are more into (cyber) security solutions, surveillance radars or defence. Familiar names include RTX (former Raytheon), Boeing, Northrop Grumman, Lockheed Martin, and Rolls-Royce. RTX is known for being one of America’s prime defence contractors, while Boeing is better known for its commercial airplanes segment.
Most defence companies have poor ESG practices and, thus, poor ESG ratings. Out of the 19 companies in the Saxo Defence Stock basket, only one company (Hensoldt) has the top ESG risk rating, according to Sustainalytics, a leading ESG research and data firm. All the other companies have average or below-average ratings and, as such, would not be considered ESG stocks.
The outlook for defence stocks
According to the International Institute, global defence spending surged to a record USD 2.2 trillion in 2023, with Europe alone investing USD 388 billion. The UK is also expected to increase its defence budget, reaching USD 108 billion by 2030, which represents 2.5% of its GDP.
This increased spending has significantly boosted the revenues and stock prices of defence companies. Saxo’s basket of defence stocks outperformed the MSCI World Index in 2023, delivering returns of 33.2% (including reinvestment of dividends) compared to 23.8% for the index. Since its inception on 31 December 2015, Saxo’s Defence Stock basket is up 257%, compared to 139% for the MSCI World Index.
To exclude or not to exclude?
Certainly, defence companies make weapons that are used in wars and are responsible for human losses, but this does not give the complete picture. Defence companies do provide defence and protection that help maintain peace and security. In today’s world, where diplomacy fails at times, defence companies and their weaponry provide national security and serve as a deterrent to enemy attacks.
Including defence stocks can be a difficult choice for an ESG investor and, ultimately, is a matter of opinion. Whatever the choice, it is important not to demonise those investors who choose to invest in them and defence companies, even those that produce weapons. After all, those same weapons ensure safety and protection for everyone.
Investors who invest in UAE stocks can make smart investments, including in defence stocks. These stocks provide diversification and can boost overall portfolio performance.
Past performance is no guarantee of future results.
