Europe’s top money managers start to bring defence stocks in from the cold

European asset managers are facing increasing pressure to reconsider their policies on investing in the defence sector. With clients and politicians urging them to loosen restrictions and help fund Europe’s re-armament efforts, many are reevaluating their stance on investing in defence companies.

Under current European Union rules, funds labeled as sustainable must ensure that their investments ‘Do No Significant Harm’. This has led many asset managers to avoid the defence sector altogether, with companies like Rolls Royce and Airbus deemed off limits. However, with the EU seeking around 800 billion euros to bolster defence capabilities following calls from U.S. President Donald Trump for Europe to take more responsibility for its security, the sector has become too important to ignore.

Leading investors like Legal & General are now looking to increase their exposure to defence, citing the sector’s growing appeal amid deeper geopolitical tensions. European fund groups are also reviewing their policies at the board level, acknowledging the complexity and controversial nature of incorporating arms makers into their portfolios. Switzerland’s UBS Asset Management and leading consultant Mercer have indicated that they are reconsidering their exclusions on the defence sector, reflecting a broader shift in investor sentiment.

The EU’s increased spending on defence has resulted in record highs for European aerospace and defence stocks, prompting investors without exposure to rue missed opportunities. Some clients are now advocating for investments in the defence sector, emphasizing the importance of Europe’s ability to defend itself in the face of rising security threats.

While exclusions on investing in controversial weapons remain common, there is a growing realization that excluding the defence sector entirely may no longer be justified. Political pressure from countries like the UK and France, as well as changing ethical investing standards, are pushing asset managers to reassess their approach to defence investments.

Despite some skepticism within the industry, there are signs that sustainability-minded funds are beginning to reconsider their stance on defence. Data from Morningstar shows an increase in aerospace and defence holdings in European asset managers’ portfolios, indicating a shift towards a more positive stance on the sector.

As the geopolitical landscape continues to evolve, asset managers are recognizing the need to adapt their investment strategies to reflect the changing priorities in the defence sector. By balancing ethical considerations with the demand for robust defence capabilities, European asset managers are navigating a complex and rapidly evolving investment landscape.