Now, with Russia waging war against Ukraine and Europe rearming its militaries, the responsible investment industry is rethinking its historic exclusion of weapons companies. There is a growing consensus among asset managers in Western nations that military investments are not only acceptable but are urgently needed for the defence of Europe.

Yet some responsible investment managers are pushing back, saying that the fundamental objection to military companies has not changed and that sustainability-focused investors have better choices for their dollars and euros. Here are some questions and answers about this remarkable turnaround on a fundamental principle of responsible investment.

It is not the mission of sustainable or ethical investors to come to the rescue of the defence industry.

– Ketan Patel, CEO, Greater Pacific Capital,

Why did early socially responsible funds object to military investments?

Pax World Fund was launched in 1971 by Luther Tyson and Jack Corbett, two United Methodist ministers and anti–Vietnam War activists. Tyson and Corbett established the fund as a vehicle for churches to avoid investing in companies manufacturing Agent Orange, napalm and other weapons for the Vietnam War. The fund became an early pioneer in the socially responsible investment (SRI) movement.

For activists who inspired these nascent SRI funds, the logic was clear: marching in protests against nuclear armaments while investing their assets in companies profiting from the Vietnam War and Cold War was simply incompatible. As “Ban the Bomb” rallies drew millions of protesters in the United States and Europe, a strict military exclusion became commonplace in the new SRI funds launched in the 1980s.

What happened to the blanket defence exclusion?

Peace protests waned with the fall of the Berlin Wall in 1989. In the 1990s, the absolute exclusion of defence companies in SRI funds gave way to a more nuanced approach.

Leading aerospace and technology companies were (and still are) active in both civilian and military production. Sustainable investment funds, as SRI came to be known in the 2000s, adopted a new policy to limit the exclusion to companies specifically manufacturing controversial weapons, including anti-personnel mines, cluster munitions and biological, chemical and nuclear weapons.

Some sustainable funds set defence thresholds, permitting investments in companies with military revenues below a certain level, such as two, five or 10% of total sales.

Where does the military exclusion stand today?

This spring, three leading European sustainable investment managers – UBS, Allianz and DWS Group – dropped their 10% thresholds for military production. Allianz and UBS also announced they would no longer exclude companies with nuclear production in their sustainable funds. Legal & General, the largest asset manager in the United Kingdom, also announced it will increase its defence industry holdings.

In addition to these recent public announcements, the industry has been quietly moving to relax its defence exclusions. Thirty-five percent of European sustainable investment funds held some exposure to defence stocks in the first quarter of 2025, an increase from 24% in the first quarter of 2021, according to Morningstar Direct.

The issue of military screens in U.S. sustainable funds has not attracted as much attention as in Europe, partly because it has been overshadowed by the heated debate on fossil fuel exclusions. However, 63% of entities issuing sustainable investments in 2024 excluded military investments from their portfolios, according to data collected by the U.S. Sustainable Investment Forum. It’s not known if this is up or down from the previous survey in 2022.

How can companies that make products for death and destruction be ‘sustainable’?

Europeans fear that Russian aggression won’t stop at Ukraine. But European defence production has lagged in recent years, and Europe has come to depend on non-European contractors, primarily from the United States, for much of its military equipment.

In response, the European Union has established the ReArm Europe initiative, a loan program to unlock private investment for Europe’s defence sector. The target is to increase European military spending by €800 billion over five years. For some proponents of environmental, social and governance (ESG) investing, the European defence buildup should be a welcome and positive choice in sustainability portfolios.

“Europe’s armaments companies deserve to be reclassified from untouchables to legitimate components of the ‘S’ in ESG,” writes Stephen Davis, a corporate governance researcher at Harvard Law School and one of the founders of the United Nations Principles for Responsible Investment. “The products they produce are deployed at least in part to ensure the most basic social good: keeping people in Europe safe and free.”

Do sustainable investment managers have misgivings about investing in tanks, F-35s and nuclear bombs?

Some ESG managers and advisers are pushing back against the headlong rush to reconcile with weapons makers.

European asset manager Candriam reaffirmed its exclusion on manufacturers of controversial weapons and is staying the course on military thresholds (10% or 3%, depending on the stringency of different funds). Candriam said it is holding the line given the complex and opaque nature of the defence industry, creating potential supply chain, corruption and human rights risks.

“The idea that weapons can only be produced and deployed in a specific conflict is naïve at best, in a world where the international arms trade services the highest bidder with little or no regard to the morals and ethics of the buyer or where the weapons will be deployed,” writes Ketan Patel, CEO of Greater Pacific Capital, an ESG impact investor in Asia and India, in an industry commentary.

On this point, KLP, Norway’s largest private pension fund, recently dropped two companies from its portfolio – U.S.-based Oshkosh and Germany-based ThyssenKrupp – because they have sold or continue to sell equipment used by the Israeli army in Gaza. KLP cited its military investment guidelines, which exclude companies selling weapons used in “serious and systematic breaches of international law.”

RELATED

The 50 most sustainable companies in Europe

To boost competitiveness, Europe proposes slashing key climate rules

How some sustainable investors are getting Tesla out of their portfolios

Where does this leave investors who have a social or environmental focus?

For sustainability-oriented investors, it’s important to keep in the mind the European regulatory distinction between funds with sustainability characteristics (Article 8) and funds with sustainability objectives (Article 9). Investors looking for incorporation of ESG factors in a diversified portfolio and who are comfortable with some defence exposure can look to Article 8 funds. Investors looking for sustainability action on issues like climate change and a more restrictive view on defence are more likely to find these strategies in Article 9 funds.

As with all financial decisions, it’s important for investors to research individual funds to ensure consistency with their goals.

In the United States, investor advocacy group As You Sow maintains a database ranking funds for 401(k) or personal investment accounts based on defence exposure. The group also works with Corporate Knights on an annual ranking of the world’s top Clean 200 companies, which can be used as a resource for sustainability-focused stock portfolios. The list excludes major military arms manufacturers, as well as cluster munitions, nuclear weapons and civilian firearm manufacturers.

“Investors who want to support the defence industry are free to direct their capital, but it should not be the case that sustainable investors are accused of not being patriotic by failing to follow suit,” Patel writes. “It is not the mission of sustainable or ethical investors to come to the rescue of the defence industry.”

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).

The post Russia’s invasion of Ukraine has put weapons makers back in responsible investment funds appeared first on Corporate Knights.

The following day as a firestorm raged in response to the controversial tweet, Lockheed Martin CEO Marillyn Hewson was the only major corporate chief to appear on stage with Trump at a White House business summit, lending the president an imprimatur of blue-chip legitimacy.

Given that Lockheed Martin is at the heart of the military industrial complex as the Pentagon’s number one supplier, this may not be surprising, but the especially cozy relationship between the White House and the company prompted the national security trade publication Defense One to label Hewson as Trump’s favourite Defense CEO. “Lockheed CEO Marillyn Hewson is now clearly ‘all-in’ on 2020 Trump re-election,” Jim McAleese, who runs the Virginia-based McAleese and Associates consulting firm, wrote in a July 15 note to investors.

Politics aside, Lockheed Martin is the largest weapons company in the U.S., with a history that includes making the bomber that dropped Little Boy, the first nuclear weapon that decimated Hiroshima during the Second World War. Many people consider Lockheed Martin the antithesis of responsible investment. Some of the world’s largest investors who do invest in other major weapons companies—such as the US$1 trillion Norwegian Sovereign Fund and US$564 billion Dutch pension APG—will not touch Lockheed Martin with a ten-foot pole, because of its one-third interest in the company that runs the U.K. Government’s nuclear weapons program.

Can weapons be sustainable?

Corporate Knights also excludes Lockheed Martin from consideration on our annual Global 100 Most Sustainable Corporations in the World list, as the company derives more than half its revenue from weapons. Lockheed Martin’s director of sustainability Matthew Swibel expressed his discontent with this decision in a note to me in 2014 in which he wrote:

“The irony is thick today with regards to your list’s exclusionary scheme. During today’s 3Q14 Earnings Webcast, our CEO boldly talked about the mark of Lockheed Martin’s ESG performance. It is self-evident to sophisticated investors that the Aerospace & Defense sector, and LMT in particular, plays an important and critical role in industrial-scale solutions for sustainability in the realms of energy, cyber, corruption controls, climate science, safety and more.  And there’s a widely held belief that core weapons platforms counter perilous security threats to the free world and the fiercest challenges to sustainable development.”

To be fair, Lockheed Martin, through its Skunk Works division,  is a significant investor in emerging clean technologies such as compact fusion and blimp-like hybrid airships, which have breakthrough potential to decarbonize the economy.

But the company’s main bet is on the F-35 fighter jet, which generated 27% of overall revenues in 2018, and the company guidance suggests it will make up an even greater portion of revenues in years to come.

Therein lies a big political risk for investors. A sizable chunk of its international sales prospects have been derailed in recent years from Turkey to Canada. Remember when Stephen Harper’s government announced the planned purchase of 65 Lockheed Martin F-35 fighters back in 2010 – with promised delivery by 2020. This became an election issue in 2015, drawing criticism over the high costs, the lack of public competition and the fact that F35s are single-engine fighters. It’s 2019, and there are still no F-35s in Canada, with a new procurement process delaying any final order decisions until 2020.

Canadian pensions invested in Lockheed Martin

Think you don’t have anything to do with Lockheed Martin? Not the case if you are members of any of the following major pension funds, which all invest millions of dollars in Lockheed Martin.

 

INVESTORS	LOCKHEED MARTIN SHARES (US$)
Caisse de Depot et Placement du Quebec	$61,455,359
Canadian Pension Plan	$59,476,404
British Columbia Investment Management Corp.	$15,534,180
PSP Investments	$8,273,610
Vestcor Investment Management Corporation*	$1,866,396
Ontario Teachers’ Pension Plan Board	$1,530,816

Source: Most recent SEC 13F filings

*Jointly owned by the New Brunswick Public Service Pension Plan and the New Brunswick Teachers Pension Plan.

That said, it’s not like Lockheed Martin is hemorrhaging cash. Revenue has increased in each of the past three years, and the company recently raised earnings estimates for the year.

As Lockheed Martin makes up a scant 0.21% of the MSCI ACWI, the global benchmark of blue-chip stocks, investors can afford to look elsewhere without dire risks of reducing their investable universe.

What should you invest in instead?

One interesting stock with less potential of blowing up the world or your portfolio is Dassault Systèmes, which ranked number one overall on our 2018 Global 100 Most Sustainable Corporations in the World list.

Founded in 1981 as a spinoff from another major military contractor France’s Dassault Aviation, Dassault Systèmes has a mission “to help industry make products that help to harmonize production, nature and life.”

Its 3D Experience software platform allows customers to “virtualize” the design process for products by creating 3D designs and simulating their use on screen before they are made in the physical world, obviating much waste from building physical prototypes.

Among the aircraft that Dassault Systèmes’ software has helped design is the ground-breaking Solar Impulse 2, the first aircraft to fly around the world using only solar power.

Although the company started out creating design tools for aircraft manufacturers, aerospace now makes up only 13% of its sales. The industries it currently serves include automotive, energy, consumer goods and construction. Its products can now even model, simulate, visualize and experience entire cities as they become increasingly connected, integrated and smart.

From a shareholder perspective, Dassault Systèmes has generated a total return of 160.85% over the past five years through to July 18, besting Lockheed Martin’s 153.45% result over the same time period, albeit with slightly higher volatility and lower dividend yield.

Beyond returns and its products and services, Dassault Systèmes stacks up favourably against Lockheed Martin on carbon footprint (two thirds lighter), CEO-to-average worker pay (10x lower ratio), board gender diversity (42% versus 25%) and percentage of taxes paid (27% versus 20%).

Bottom line: With Dassault Systèmes, you can invest in clean solutions rather than bombs and still get bang for your buck.

Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. Lower beta means less risk.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!

The post Are Lockheed Martin’s nuclear weapons fueling your retirement? appeared first on Corporate Knights.