Journal of Sustainable Finance & Investment

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Quo vadis sustainable finance: Why defensive

weapons should never be classified as an ESG
investment

Amar Causevic, Sasja Beslik & Sara Causevic

To cite this article: Amar Causevic, Sasja Beslik & Sara Causevic (19 Oct 2022): Quo vadis
sustainable finance: Why defensive weapons should never be classified as an ESG investment,
Journal of Sustainable Finance & Investment, DOI: 10.1080/20430795.2022.2135965

To link to this article: https://doi.org/10.1080/20430795.2022.2135965

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JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
https://doi.org/10.1080/20430795.2022.2135965

Quo vadis sustainable finance: Why defensive weapons

should never be classified as an ESG investment
a
Amar Causevic , Sasja Beslikb and Sara Causevic c,d

a
Stockholm Environment Institute, Stockholm, Sweden; b SDG Impact Japan Inc., Tokyo, Japan; cDepartment
of Global Public Health, Karolinska Institutet, Stockholm, Sweden; dSwedish Institute for Global Health
Transformation (SIGHT) at the Royal Swedish Academy of Sciences, Stockholm, Sweden

ABSTRACT ARTICLE HISTORY

The Russian invasion of Ukraine has influenced how investors Received 29 September 2022
categorize sustainable investments. More precisely, an invasion Accepted 11 October 2022
has been used as an excuse to label investments in companies
KEYWORDS
supplying weapons used in self-defense to fight against Russian Conflict; sin stocks;
aggression as socially sustainable since they are a tool helping sustainable finance; SDGs;
democracy to repel the invasion of the non-democratic climate change
counterpart. Suddenly, the weapons industry started becoming
an entirely acceptable sustainable investment asset. This
demonstrated that weapons are not the cause but only the result
of flawed sustainable investing thinking, which can sometimes be
based on ideas that vary widely in terms of consistency and
accuracy. This paper discusses some of the reasons underlining
systematic problems in the sustainable finance realm and lists
why defensive weapons can never be classified as an acceptable
asset to invest in.

Introduction
In the early morning of 24 February 2022, Russia invaded Ukraine. Hostilities had been
slowly accumulating between the two countries since the brief Russo-Ukrainian War in
2014 (Kirby 2022). Lithuania, Poland, Romania, Moldova, and Hungary received most of
the more than 6 million people who have fled the country since mid-May 2022 (UNHCR
2022). The European Union (EU) and the United States (US) provided Ukraine with bil-
lions of euros and dollars in humanitarian, financial, and military aid (Kiel Institute
2020). Simultaneously, with over 5,000 different targeted sanctions, Russia became the
world’s most-sanctioned country – surpassing Iran, Syria, and North Korea (Vuksic
2022).
The Russian invasion of Ukraine has brought large-scale urban destruction, increased
human suffering, and political debates linked to the relevance of the enlargement of the
EU and the North Atlantic Treaty Organization. It has also profoundly impacted the
realm of sustainable finance.

CONTACT Amar Causevic amar.causevic@sei.org Linnégatan 87D, 115 23 Stockholm, Sweden

This article has been corrected with minor changes. These changes do not impact the academic content of the article.
© 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License
(http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any
medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.
2 A. CAUSEVIC ET AL.

More precisely, the invasion has raised important questions regarding how investors
perceive Environmental, Social, and Governance (ESG) principles and what that means
in practical application when it comes to sustainable investing.
As the Ukrainian government repeatedly asked the EU and the US for ‘weapons,
weapons, and weapons’, Western governments decided to respond to this request
because they saw arming Ukraine as the best solution to counter the large-scale
Russian invasion (Reed and Henry 2022). For the first time in history, the EU pledged
to provide €500 million in weapons to Ukraine (Bilquin 2022). Additionally, the US pro-
vided around $3.8 billion in military assistance (United States Department of State 2022).
The financial markets were not immune to this geopolitical event and the injection of
government funding into the defense industry. The German defense industry lobby
group (BDSV) took the position that defensive weapons are guardians of democracy,
using the Ukrainian case to back up their statement (Ainger and Arons 2022). BDSV
argued that defense weapons should be included in the EU Taxonomy registry alongside
natural gas and nuclear energy, recently added to the EU’s list of ‘accepted environmen-
tally sustainable economic activities’ (Dwyer 2022).
Meanwhile, one of the biggest banks in the Nordics, Swedish SEB, decided to reverse
its sustainability policy and permit some of its funds to invest in defense companies
(Skandinaviska Enskilda Banken AB 2022). The price of stocks of major weapons produ-
cers in the West has seen a sharp increase since the beginning of the invasion of Ukraine
(Adetunji 2022).
Does this mean that weapons will slowly evolve from ‘sin stock’ to acceptable ESG
investments?

Why weapons should not be classified as an ESG investment

The United Nations (UN)-supported international network of investors,
the UN Principles for Responsible Investment (UNPRI), defines responsible investing
as a strategy and practice to incorporate ESG elements in investment decisions and
active ownership (Douma 2020). ESG-labeled investment should have a wide-scale
range of benefits that could equally and simultaneously benefit society and the
environment.
ESG investing should be long-term and multifaceted, meaning the investments are
more than just profit drivers. Moreover, investments are seen as working toward the bet-
terment of society because they are based on principles and values. More precisely, inves-
tors should be ready to sacrifice returns for value-aligned investment choices.
Beyond UNPRI, the Sustainable Development Goal (SDG) 16 promotes peaceful and
inclusive societies for sustainable development and advocates for reducing all forms of
violence and related death rates globally. The arms industry (i.e. weapons) prevents
countries and the world as a whole from meeting the SDG 16 targets. Weapons are
designed for destruction, threatening societies’ desire to build equitable and universal
access to impartial justice and vital services through promoting violence.
Weapons and war also pollute the environment and fighting generates greenhouse gas
emissions. Already, the Ukraine war has contributed to a global rush to secure fossil fuel
supplies. Russian invasion caused soaring energy prices, significantly increased invest-
ment in oil and gas projects across the globe (Climate Action Tracker 2022).
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 3

Additionally, military arsenal (e.g. airplanes, tanks, and ships) used in the war are
machines that consume large amounts of diesel. Emissions are also coming from the
war efforts themselves: burning housing infrastructure, broken gas lines, ammunition
storages going up in smoke, from individuals switching to diesel generators because
they lack access to electricity (Simon 2022).
When we think about weapons, scanning them through the ESG principles lens, there
are several strong reasons why these assets do not satisfy ESG criteria. First, it is tough to
determine whether the weapons will be used according to the ESG principles. Weapons
could be classified as defensive and offensive. Still, the weapons’ character depends on the
user’s preferences (i.e. the army) or how the user will utilize the weapons’ power at their
disposal.
Arguably, delivering certain weapons to Ukraine would genuinely serve the purpose of
ESG investing by protecting human rights since militarily superior Russia attacked the
country, which did not pose any serious threat to its security. Conversely, certain
weapons used in Ukraine to help the country defend itself are also used to arm the
Saudi Arabian Armed Forces, which since 2015 have been conducting a series of military
incursions in Yemen using Western-made weapons, resulting in serious crimes again
humanity (Hartung and Draper 2020; Burki 2021).
Second, compared to other ESG-classified industries (e.g. renewable energy), the arms
industry has never had a problem attracting capital. In 2020, sales of arms and military
services by the100 largest companies in that sector totaled $531 billion, growing by 1.3%
amid the COVID-19 pandemic (SIPRI 2021).
As numerous researchers have demonstrated, on average, more typical ESG invest-
ments have a much harder time attracting the funding they need (Wiek and Weber
2014; Whelan and Fink 2016; Maiti 2020; PricewaterhouseCoopers 2022). Most arms
industry contracts are long-term deals with governments that encompass secure
funding arrangements (Lineberger and Hussain 2018; Hartung 2021). Solar, wind, and
hydropower renewable energy investments need government subsidies that they have
a hard time retaining (Baietti, la Rocca, and Causevic 2015).
Third, the arms industry is characterized by practices of non-transparency and cor-
ruption. A recent analysis of 134 of the world’s leading arms companies showed that
100 examined companies demonstrated little to no commitment to tackling corruption
(Transparency International 2020). Furthermore, the industry is poorly regulated. For
example, the global trade in bananas is more tightly regulated than the global trade in
arms (Yale Global Justice Program 2021).
The veil of national security-imposed secrecy has allowed politicians, military leaders,
corporate executives, and dubious intermediaries to conduct non-transparent trans-
actions replete with corrupt actions. This is evident in the fact that 61 companies in
the abovementioned study show no clear evidence of policies or processes to assess
and manage risk in their markets (Transparency International 2020). Only 13 companies
actively disclose full details of the countries where they conduct business.
Fourth, an increasing body of scientific literature demonstrates that using weapons has
a strong negative impact on the environment (Handley-Sidhu et al. 2010; Certini, Sca-
lenghe, and Woods 2013; Manduca et al. 2019; Skalny et al. 2021). Besides the loss of
human life and destruction of infrastructure, weapons can devastate a landscape and
have long-lasting environmental consequences. Different chemical substances that are
4 A. CAUSEVIC ET AL.

part of the weapons themselves (e.g. depleted uranium in bombs) or substances used to
manufacture the equipment can decimate ecosystems and emit toxic substances in soil,
air, and water that endanger humans, animals, and plants in the long-term.
Fifth, the arms industry manufacturing processes are resource- and emissions-inten-
sive practices. The global defense industry currently contributes 2% to global carbon
dioxide emissions, but if its growth continues alongside current projections, this share
could rise to 25% by 2050 (Dimitrova et al. 2021). Also, pollution from dumped or aban-
doned weapons manufacturing waste contributes directly to the weapons industry’s
carbon footprint.
But sometimes, the emissions are not direct and instead are part of the arms industry’s
modus operandi. For instance, the Al Yamamah Arms Deals between the United
Kingdom and Saudi Arabia occurred between 1985 and 2008. The United Kingdom
agreed to accept 600,000 barrels of crude oil per day as payment from its Saudi counter-
parts (de Vries 2021). Moreover, manufacturing weapons requires significant quantities
of many different materials: more precisely, 39 types of raw materials, including gold,
magnesium, and titanium, are necessary to produce different weapons in the EU. Of
these, 19 are imported from abroad, increasing their carbon footprint and exporting
their mining impacts abroad (Pavel and Tzimas 2016).
Lastly, the UN Universal Declaration of Human Rights implies that all humans are
born free and equal in their dignity and rights. Humans are endowed with reason and
conscience and should act towards one another in a spirit of brotherhood and sisterhood.
Human rights are universal and applicable to all human beings. Weapons cause viola-
tions of human rights and societal fragmentation.
And when it comes to the SDGs and ESG principles, weapons do not guarantee social
inclusion and protection of health and well-being through healthcare, access to essential ser-
vices, and minimum income. Weapons instead cause harm to overall physical and mental
health. And weapons destroy gender equality, one of the leading social pillars of ESG principles.
Conflicts adversely affect the socioeconomic empowerment of women and girls living
in war-torn and otherwise violent zones. Women and girls are more susceptible to radi-
ation from weapons than men (Borrie et al. 2016). Water scarcity frequently occurs in
conflict and affects health and sanitation, including the dignity of menstruating girls.
The toxicity of soil further enables food insecurity, which also triggers infection,
disease, wasting, and stunting in children (Semet 2020).
Conflicts erode social cohesion, and the neoliberal approach to allow weapons to become
a positive investment instead puts profits over people and increases social inequities.

Certain systemic problems of the ESG universe

The idea of labeling defense weapons as ESG-approved investments points to a systemic
problem the ESG field is experiencing. That is because some ESG data can sometimes be
prone to inaccuracies.
In 2020, for example, the global clothing giant H&M earned a 70/100 score for sustain-
ability on the Dow Jones Sustainability Index (H&M Group 2020). At the same time, the
company faced issues that should have decreased that score, such as its responsibility for
environmental pollution where its clothing is made and for paying workers low wages in
developing countries (Beslik 2020). Another example is the tech giant Facebook. Before
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 5

the Cambridge Analytica scandal, in which Facebook allowed a British company to

harvest data of millions of users without their consent, the tech giant had a solid ESG
score for years (Mooney 2018).
Deep in their design, not all ESG funds are sustainability-oriented. A recent report by
CIBC Capital Markets discovered that ESG funds owned twice as much Russian oil and
gas as Canadian oil and gas at the end of 2021. Russian energy companies NK Lukoil,
Novatek, Gazprom, and NK Rosneft, accounted for around 0.2% of worldwide ESG hold-
ings (CIBC Capital Markets 2022).
In the first month following the onset of the war in Ukraine, a $2.1 billion BlackRock
emerging-markets bond fund that tracks a JPMorgan ESG index decreased by 4.74%
(Wriz 2022). The ESG fund underperformed because it had relatively large allocations
to Russian government bonds, which are heavily backed by the fact that the country is
one of the major global fossil fuels producers.
This is not surprising because the ESG field is still in its early stages of development
and the definition of sustainability is fluid across geographies and cultures. However, this
can sometimes present a risk because of the potential of greenwashing a product (i.e.
defensive weapons) and can potentially lead to greenwashing certain aspects of the
ESG field (Fancy 2021).
In mid-May 2022, at the Financial Times Moral Money conference, HSBC’s Global Head
of Responsible Investments, Stuart Kirk, firmly stated that climate change is not a financial
risk and that investors need to worry about a different set of debates across the world (Finan-
cial Times 2022). Kirk received a lot of criticism and he was immediately suspended from
HSBC. However, his presentation sparked discussions around the sustainable finance
market. Inconsistent definitions of what qualifies as a good ESG investment can produce a
lot of discrepancies (Ricketts 2022). Therefore, it is understandable why certain financial
actors would like to label defensive weapons as a pro-ESG investment.

Conclusion
Integrating ESG principles into the modus operandi of the global economy and financial
system is an ongoing and constantly evolving process (Beslik and Sayyad 2021). The
system needs to be continuously updated and monitored, especially if humanity wants
to combat climate change more efficiently by redirecting and greening mainstream
financial flows (Rezende de Carvalho Ferreira, Vinicius Amorim Sobreiro, and de
Moraes Barboza 2016).
Some banks and investors did not show significant commitment to investing in com-
panies and sectors that truly promote ESG principles. In 2020, the value of sustainability-
themed investment products amounted to $3.2 trillion, which shows that the trend is
increasing. However, this type of finance is still minuscule compared to investments in
traditional finance (UNCTAD 2021).
ESG data and reporting standards are crucial because these mechanisms measure the
side effects that humanity needs to manage better. Nevertheless, the structure of the data
will need to improve. Besides account filings, financial reports, and market data from
which a company’s financial health or activity can be assessed, other data such as satellite
imagery, product reviews, and social media content should be evaluated to have a more
in-depth ESG analysis.
6 A. CAUSEVIC ET AL.

Having alternative data will give investors a broader picture of the ESG compliance of
a prospective investment. Raw data on company performance can provide a certain level
of analysis. Still, this data should be complemented with alternative data to fill the
missing gaps, ensuring transparency and accuracy of ESG screening for specific compa-
nies. Doing so would make it easier to enhance the protection against greenwashing and
ideas that weapons can be labeled as investments containing ESG principles.
Some banks claim that by investing in weapons, they are directly contributing to pro-
tecting democracy, freedom, stability, and human rights while at the same time strength-
ening their ESG performance; however, other already available financial mechanisms can
more credibly justify their ESG purpose. For example, by investing in sustainability or
green-focused sovereign bonds (i.e. Lithuania, Poland, France, and South Korea), inves-
tors can invest in democratic countries to build better societies (OECD 2021). Hence,
there is no need to invest in weapons and claim that investing in these assets will
strengthen their ESG value – this is simply not the case.
ESGs should positively impact investments by promoting SDGs. However, the result is
the opposite when investing in weapons under a false sustainability pretext. By support-
ing investment in weapons, ESG is generating setbacks in healthcare, individual health,
and gender equality that violate the achievement of SDGs 1, 3, 5, and 16.
The idea of ESG principles for investment is benevolent at its core. However, for the
investment to obtain its full potential and become a true force for change, it needs to be
based on principles that consider E, S, and G alongside SDGs first and profit second.
Defensive or any other weapons simply do not fit in this concept.

Declaration of interest statement

The authors declare that they have no known competing financial interests or personal
relationships that could have appeared to influence the work reported in this paper.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Funding
Stockholm Sustainable Finance Centre partially funded this work.

ORCID
Amar Causevic http://orcid.org/0000-0003-4630-1717
Sara Causevic http://orcid.org/0000-0003-0271-8000

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