SNA (Sydney) — As military capabilities become more vital in deciding the outcome of Russia’s invasion of Ukraine, debates surrounding whether environmental, social, and governance (ESG) funds should be open to weapons investment have increased.

ESG criteria are used to determine whether company investments reflect their written policies and values. They encourage firms to engage in more responsible, less harmful investment practices.

Currently, there are no uniform standards or rating systems for ESG portfolios. This has led to ongoing debates about what “environmental, social, and governance” mean as criteria. Subjectivity has led to certain investments being seen as noncompliant by some, but compliant by others.

For example, an article in Raconteur, an online publisher of business-related content, quoted political analyst Tina Fordham as commenting that investors should appreciate “the role of defense and security in ensuring democracy… and all of the things we believe in.” In contrast, Amy Clarke, chief impact officer and cofounder of Tribe Impact Capital, insists that “defense is the culmination of where government, business, and society have failed.”

According to research firm Morningstar, over 44% of so-called sustainable funds have “some exposure to military contractors.” The company further estimates that, globally, only 23% of such funds explicitly exclude such investments.

Nevertheless, as put by Euan Munro, chief executive of Newton Investment Management, “the question now is whether security is a common good that ESG portfolios could and should invest in.”

Ukrainian President Volodymyr Zelenskyy has been a prominent inspiration for those viewing weapons and military technologies as social goods.

AllianceBernstein, an asset management company, goes so far as to describe defense contractors as “crucial” to the maintenance of democracy. Financial News London similarly reported that the Universities Superannuation Scheme in the United Kingdom believes that the defense industry plays an important role in “protecting freedom and opposing tyranny.” According to this view, military weapons are crucial instruments for the protection of human rights.

But the issue is not so clear-cut as some advocates contend–it is characteristic for all sides in military conflicts to believe that their own side represents the side of justice.

Indeed, even for Russian President Vladimir Putin and many of his countrymen, the invasion of Ukraine was a defensive move against the encroaching power of NATO and represented “collective self-defense” for the Donbas region of Ukraine in face of growing discrimination and oppression of Russian residents.

This problem of subjectivity in international conflicts presents no easy solutions. One could add that there also needs to be a clearer grasp of whose security is potentially being compromised and, indeed, what security even means in the context of financial investment.

Security itself–the right to safety–has always been part of ESG criteria in some senses. The CFA Institute, an NPO focused on providing financial information, notes that the “S” (social) in ESG explicitly includes human rights along with other social issues such as gender equality and diversity. In fact, every component of ESG involves security: the “E” (environmental) includes combating climate change and “G” (governance) includes resisting and exposing corruption.

The question is not whether security is a common good that ESG portfolios should invest in, but whether military weapons are.

Environmentally, militaries and the defense industry have done far more harm than good. Not only are these organizations responsible for an estimated 5% of total carbon emissions globally, but they are also a cause of wildfires, landscape destruction, wildlife extinction, ecological disruption, and more. Armed conflicts even create air pollution through explosions and bombings which release dust and debris into the atmosphere.

Regarding governance, the modern arms trade has long been associated with corruption. The significant financial leverage of arms dealers is well-known in lobbying and influence peddling operations. The Yale Global Justice Program noted that roughly 40% of global corruption links back to the arms industry.

According to a report published by the World Peace Foundation, “corruption in the arms trade is most likely to touch senior members of government.”

This oversized influence appears to be closely tied to the identity of the leading agents. For example, Saudi Arabia, the world’s largest weapons importer since 2017, has become, in turn, a major exporter of weapons to war-torn Yemen. Most of these arms are originally sourced from the United States and United Kingdom. Again, this raises the issue of subjectivity–that security may mean something quite different depending upon your political standpoint and where you live.

Proponents of the inclusion of military weapons as ESG investments tend to view the issue narrowly, focusing exclusively on their purported social benefits, but it is worth recalling that the proliferation of weapons around the world does not automatically carry with it social benefits that should make them attractive to responsible investors.

World Population Review revealed that over 200,000 people died from firearms in 2019 alone. During the same year, Amnesty International contacted 22 arms companies across eleven countries and asked them to explain how their human rights obligations were being met. Amnesty reported that “none of the companies that responded were able to adequately explain how they meet their human rights responsibilities and demonstrate proper due diligence, and fourteen did not respond at all.”

Even Western governments have backed away from taking responsibility for the ultimate destination of the weapons they produce.

For example, last year UK Secretary of State for International Trade Anne-Marie Trevelyan introduced revised standards for licensing arms sales which mandated an even looser system of control. She stated that the UK government “will not refuse a license on the grounds of a purely theoretical risk of a breach” of criteria such as international obligations and commitments, respect for human rights and fundamental freedoms, and the preservation of internal peace and security.

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