Ethical investors, who typically prioritize environmental, social, and governance (ESG) factors when making investment decisions, have become more open to purchasing defense stocks in the wake of the Ukraine war, according to Charles Woodburn, the CEO of BAE Systems, Britain’s largest military contractor. Before the conflict, many of these investors had avoided defense companies, considering them unsustainable investments due to their involvement in the production of fighter jets, missiles, and tanks.
However, Woodburn stated that the perception has begun to change since the war erupted in Europe. He noted that there were previously investors who refused to engage with BAE Systems, but now the pendulum is swinging towards a more balanced position that takes into account ethical considerations, ESG considerations, as well as the need for defense and security.
BAE Systems, like other defense companies, has experienced the benefits of increased military spending resulting from the Ukraine war, leading to a 63% rise in its shares since the invasion commenced. Joachim Klement, an analyst at Liberum, highlighted that while ESG investors still avoid companies involved in controversial weapons, such as anti-person landmines, they are increasingly accommodating big defense contractors cooperating with the United States and its Western allies.
Woodburn acknowledged that further work needs to be done to make a compelling investment case for defense stocks. He mentioned that there had been a particular trend in London where investors excluded defense stocks based on ESG principles. However, this has not prompted BAE Systems to consider changing or expanding its listing destination.
Despite Brexit diminishing Britain’s appeal as a global financial center, Woodburn confirmed that BAE Systems has no intention of altering its listing destination. Various UK companies, such as ARM, a chip designer, and CRH, a building materials group, have opted to list in New York due to superior valuations and liquidity compared to London.
BAE Systems heavily relies on the United States, which accounted for 44% of its sales in 2022, with the United Kingdom being its second-largest market.
In conclusion, the war in Ukraine has caused some ethically focused investors to reconsider their stance on defense stocks. While certain weapons remain off limits for ESG investors, big defense contractors collaborating with the US and its Western allies are gradually being accommodated in ESG portfolios. BAE Systems, a major player in the defense industry, has witnessed the positive impact of increased military spending resulting from the Ukraine conflict. The company’s CEO believes that the investment case for defense stocks still requires further improvement. While some investors in London have excluded defense stocks based on ESG principles, BAE Systems does not plan to change its listing destination, as it continues to prioritize the US market.
