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### European Asset Managers Reconsider Defence Investment Policies Amid Escalating Global Tensions
In recent months, European asset managers have begun to rewrite the rules of the investment game as they face mounting pressure from both clients and government leaders to ease restrictions on investments in the defence sector. This shift comes in response to the urgent need for Europe to enhance its military capabilities, especially in the wake of geopolitical tensions that have underscored the continent’s reliance on external security guarantees.
Under existing European Union regulations, funds that are classified as “sustainable” are obligated to ensure their investments “Do No Significant Harm.” Historically, this meant that many asset managers avoided the defence industry altogether. Major companies, including Rolls Royce and Airbus—known for their significant contributions to civilian flight—were also deemed off-limits.
However, with the EU reportedly requiring around €800 billion (approximately $870 billion) to fund its rearmament initiatives, the defence sector has become too crucial to dismiss. Legal & General, the UK’s largest investment firm, is one of the key players now looking to increase its exposure to defence assets, citing a “dramatic” rise in interest due to escalating geopolitical risks.
### The Shift in Investor Sentiment
What’s driving this remarkable shift in mentality? According to Rich Nuzum, global chief investment strategist at Mercer—an advisory firm managing $17.5 trillion in assets—many clients are advocating for investments that would allow Europe to strengthen its self-defensive capabilities. “Some clients are saying it’s vital that Europe can defend itself,” Nuzum noted, underlining the urgency with which investors approach this discussion.
This sentiment is mirrored across Europe, with major fund managers, including UBS Asset Management and Allianz Global Investors, actively reviewing their exclusion policies regarding defence-related investments. Although many funds have historically distanced themselves from the sector due to ethical and sustainability considerations, the growing threat landscape is forcing a reevaluation.
### The Economic Landscape for Defence Investments
The push to invest in defence comes at a time when European aerospace and defence stocks are reaching record highs. Firms like Germany’s Rheinmetall and Italy’s Leonardo have benefited significantly, leading investors without exposure to express regrets over missed opportunities.
Yet, navigating the complex ethical landscape surrounding defence investments remains a challenge. Exclusions based on international treaties limit investments in controversial weapons like cluster munitions and biological arms, but the shifting attitudes reveal a broader acceptance of the defence sector itself. Comments from Carl Haglund, CEO of the Finnish pension group Veritas, encapsulate this shift: “The atmosphere now suggests if you rule out defence, you’re the one who has to justify that position.”
### Emerging Trends and Opportunities
The growing appetite for defence investments isn’t confined to traditional asset managers. WisdomTree recently launched what they claim is the first European defence exchange-traded fund (ETF), capitalizing on the emerging trend. This move reflects a broader trend where sustainability-minded funds may be reconsidering their cautious stance on defence, recognizing that the geopolitical climate necessitates robust defence capabilities.
Interestingly, Morningstar data reveals that European asset managers held 1.1% of their portfolios in aerospace and defence at the end of 2024, an increase from 0.7% just two years prior. The percentage of holdings in ESG-conscious funds rose from 0.4% to 0.5% during the same period, indicating a growing willingness to engage with this once-taboo sector.
### Conclusion
As the geopolitical landscape continues to evolve, so too will the strategies employed by European asset managers. The pressure from clients and political entities, combined with a changing economic climate, could lead to a substantial transformation in how defence investments are perceived and integrated into asset management frameworks. The road ahead may be fraught with ethical considerations, but the consensus seems to be steering towards a reality where a balanced approach to defence investment becomes not just necessary, but inevitable.
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