The taboo on investing in weapons is disappearing. VanEck, a provider of investment products, is therefore venturing into the European market with a fund that invests in shares of defense companies.
“I have never before done an introduction for which there was so much demand in advance,” says Europe director Martijn Rozemuller. “And at the same time it is my first investment product where emotion and reason contradict each other.”
Around the summer, investing in the defense industry became a theme at meetings in the VanEck office on Amsterdam’s Zuidas. VanEck is an American company of origin, with Dutch roots and a large department for the European market in Amsterdam. It manages approximately EUR 6.5 billion in assets in Europe.
The war in Ukraine had been going on for a few months. It was clear that countries were significantly increasing their defense spending. The market value of defense companies worldwide rose sharply and has now doubled compared to 2019. Rozemuller, who once started out as a fanatical student of investing, was often asked questions in rooms where he talks about investing about the possibilities of investing money in defense as a private individual.
The new product development team at VanEck was divided on the idea of developing a Defense ETF, a tradable “basket” of publicly traded defense companies. “We were not immediately convinced that we should do this,” he says. “At first it feels a bit like you want to take advantage of the situation.”
Moreover, the trend has been the opposite over the past five to ten years. “We have had a lot to do with ESG in the financial world [environmental, social en governance].” These are criteria for sustainable investment in the field of climate, working conditions and good governance, to measure how responsibly a company is run. And then gun manufacturers often fail to reach the bar. Because they make controversial products, such as cluster bombs, landmines or biological and chemical weapons. Or because they supply regimes that are likely to violate human rights by using those weapons.
Trembling
European investors and pension funds have therefore become wary of arms manufacturers. Dutch investments in the arms industry fell to 1.26 billion euros last year, the lowest level since 2009, the first year for which this was recorded. At its peak, in 2016, it was still 4.7 billion euros, calculated economist Martijn Boermans of regulator De Nederlandsche Bank last month. Despite the high returns, Dutch pension funds, the largest investors, continued to withdraw from the defense industry last year.
Rozemuller detects a turnaround, which he mainly bases on contact with asset managers and private individuals. He uses graphs with opinion polls on investing in defense to substantiate that the social debate is changing. He also noted statements by European politicians about the need to invest.
The Dutch Minister of Defense, Kajsa Ollongren (D66), also encouraged in September last year pension funds to become less cautious. Because with all the support for the Ukrainian armed forces, supplies are quickly being depleted. The war economy needs to pick up speed faster. On Monday, the ministry announced that it would invest 3.5 to 6 billion euros in new missile systems and two naval vessels in the coming years.
The reaction of pension funds to Ollongren’s call is tentative and in some cases hesitant. Pension fund ABP, for example, still invests in defense companies, as other funds do, but is cautious. “We are increasing our criteria when it comes to sustainability and human rights,” a spokesperson writes in a response. The minister’s call, supported by the defense top, does not change that much for the time being and even surprised ABP. According to the pension fund, the logical sequence would be that the government places orders with companies and then raises capital. At that point, funds can decide whether bonds or shares of those companies fit their policies. Not the other way around.
VanEck weighs differently. The defense of Europe is a legitimate interest and is also about standing up for human rights, Rozemuller argues. For example, when the invasion of Ukraine began, the German army was faced with a lack of spare parts. “How do we ensure that the European armed forces are back up to standard?” Saying categorically ‘no’ to arms manufacturers is then too easy for him.
The main question is which companies you do and do not want to finance. Rozemuller emphasizes that an attempt has been made to select only companies that do not produce weapons that should be banned according to international treaties, such as cluster munitions, anti-personnel mines and chemical weapons.
VanEck looks at how companies score with data analyst ISS. That is one of the largest companies in the world in the field of sustainability analysis. It assesses companies for complicity in human rights violations by third parties, including the use of military equipment that violates human rights.
Customers of the data decide for themselves how they use it. If defense companies score poorly on the ISS index, they will not be included in the basket, says Rozemuller. If their behavior deteriorates, they will be dropped from the quarterly evaluations. “The fact that a company complies this week does not mean that it will also be the case next week.”
Production of nuclear weapons
VanEck’s basket, for sale from 5 April, also includes companies that would not pass a selection by critical NGOs. This applies, for example, to the French Safran and the Italian producer Leonardo. Through subsidiaries, both have a role in the production of nuclear weapons, which should be banned according to a 2017 UN treaty not signed by the Netherlands.
Some of the chosen companies are also on ‘the wrong lists’ at NGOs because of the countries to which those companies supply products. Their weapons, for example, go to the United Arab Emirates and Saudi Arabia, despite the good chance that they will be used in the war in Yemen. This applies to the French company Thales, which in 1990 took over Hollandse Signaalmachines from Hengelo, which makes radar systems. Thales also supplied weapons to Russia after this country took Crimea in 2014 and the EU banned those supplies.
Peace organization Pax is therefore not enthusiastic about the new defense ETF. This could lead to a new flow of money being tapped for the 25 defense companies in the basket, without all of them meeting the strictest requirements.
With ETFs, shareholder involvement is often much less, says Cor Oudes, responsible investment expert at Pax. “In an ETF, investors tend to look less at the individual companies and more to choose the whole basket.” This also applies to pension funds that invest passively. “With ETFs you can generate a lot of money quite anonymously.”
The introduction of the defense ETF is for VanEck “the most exciting we have ever released”. Roze muller: “In the first reaction, reason and emotion contradict each other.” But he “peeled it off” in himself. “Then the ratio remained. And he said: ‘do’.”
A version of this article also appeared in the newspaper of April 5, 2023