As the spectre of war looms over Eastern Europe, investors are forced to reckon with the prevalence of defence stocks in ostensibly sustainable funds. 

The quintessential arms dealer is a bit of a caricature: a cartoonish, two-faced, unabashedly villainous figure who revels in widespread destruction, suffering, and human misery. It comes as a bit of a shock, then, that nearly 44% of sustainable funds include defence stocks in some capacity or another—stocks that many investors, even the less conscientious ones, reject. It’s worth noting that defence stocks are most frequently classified as “sin stocks,” alongside alcohol, tobacco, gambling, and adult entertainment. There’s an ethical value judgment built into the very fabric of the phrase sin stock, though often for good reason—sin stocks prove remarkably stable at the best of times, and positively lucrative at the worst, because the products they revolve around are exploitative, addictive, and damaging. 

People, irrespective of circumstance, will almost always continue to drink, smoke, and gamble, especially during periods of crisis or turmoil. (The performance of sin-centric funds like VICEX shortly after the implementation of COVID-19 lockdowns confirms as much.) Weapons manufacturers prove no different; in the absence of war, they’re insurance, and in times of war, they’re a necessity. 

Perhaps that’s why the Brookings Institution’s Michael O’Hanlon argues that “war,” while far from ideal, is undeniably “good business.” He’s not entirely wrong: despite Russia’s invasion of Ukraine having exacerbated runaway inflation in all four hemispheres and strained already-tense diplomatic relationships, defence stocks have performed exceptionally well, with major weapons manufacturers' share prices skyrocketing since the outbreak of the war. In spite of their reputation, defence stocks are something of an outlier among sin stocks: a stranger among strangers. They show up with alarming frequency in sustainable funds, and manage to narrowly evade the intense stigma associated with other unsavoury investments. As war rages on the fringe of Europe—and as weapons manufactured by the very companies whose stocks routinely show up in ESG-aligned funds continue to claim lives—ESG investors find themselves forced to reckon with the prevalence of defence stocks in ostensibly sustainable funds. 

Defence industry lobbyists, as one might expect, are quick to frame weapons manufacturers as social benefactors, rather than necessary evils or callous opportunists. Jan Pie, a European defence industry lobbyist, argues that it’s impossible to “have any kind of sustainability” without the capacity to “defend the open values of democracies.” It’s an argument that rests firmly on the same kind of rhetoric used to justify unwarranted military engagements and proxy wars—rhetoric that rather conveniently skirts the very real ethical qualms associated with investing in defence: loss of life, catastrophic environmental consequences, and a longstanding reliance on the fossil fuel industry. 

That’s not to say, however, that experts on sustainability unilaterally agree that defence stocks have no place in socially responsible investing. As Jon Hale suggests in a recent column for Morningstar, “sustainable investing is not an anti-defence-industry monolith”, and simply excising defence stocks from sustainable funds would prove both ineffective and reductive. “There is no single path,” writes Hale, “to sustainability or competitive investment results.” While his column is a response to critics of sustainable investing who argue that sustainable funds exclude the very investments that “the world needs most,” and not a criticism of sustainable investing itself, it does throw the nebulosity of ESG and SRI into sharp relief. While much of the pushback against defence stocks is mired in a series of ethical gotchas!, there’s extant precedent for sustainably investing in defense—and that’s something investors can’t ignore. 

If there is a broader takeaway from all of this, it’s that sustainability is nuanced, iterative, and often self-contradictory. As the Russo-Ukrainian War wears on, investors can expect no shortage of discourse about the role defence stocks play in a contemporary investment landscape. It bears noting that, as much as investors want there to be one, there really is no right answer.

Navigate the difference between SRI, ESG, and Impact Investing here.