Several pension funds in Europe are reviewing long-standing exclusion policies on weapons manufacturers, as they work to update their portfolios to match the political moment.
PFA Pension, Copenhagen, which oversees about $120 billion, told Bloomberg it’s now in talks with its board about removing a ban on holding companies that make components for Western nuclear defense. AkademikerPension, Gentofte, Denmark, which manages over $20 billion, says it’s asking members whether it can increase exposure to arms manufacturers, including those producing controversial weapons.
Meanwhile Europe’s biggest pension fund, Stichting Pensioenfonds ABP, Heerlen, Netherlands, says it’s already an investor in defense companies and is willing to increase its exposure to the sector to support the bloc’s strategic needs.
“This is a special situation,” Jens Munch Holst, the chief executive of AkademikerPension, said in an interview. “It’s a fight for democracy and without democracy we don’t exist. It’s an existential problem right now.”
Holst is part of a growing investor movement in Europe that’s trying to adapt to a dramatically altered geopolitical map. With Donald Trump’s presidency leaving Europeans unsure whether the U.S. remains a reliable ally in a world shaped by Russian aggression, defense spending has become the region’s No. 1 priority.
AkademikerPension is now preparing to ask members whether it should ease restrictions on defense allocations, including lifting a ban on moving into companies that produce controversial weapons such as cluster bombs, said Holst.
ABP already holds somewhere between €400 million ($436 million) and €2 billion in companies that contribute to the defense industry, depending on how broad a definition is applied. But it also cautioned that buying shares on secondary markets isn’t the same as expanding Europe’s defense capacity.
In a written comment to Bloomberg, the Dutch pension fund manager said that scaling up requires “a consistent investment policy by governments.” And institutional investors want to see signed defense contracts, ABP said.
At the same time, the investor underscored that “if financing is needed to expand capacity, ABP is willing to invest in it, if the risk and return on that investment are appropriate.”
Rasmus Bessing, the head of ESG investing and co-chief investment officer at PFA, said the fund “would be willing to discuss projects that will provide direct finance to European defense, of course always keeping in mind that we need to assess all investments and” to make sure “they make financial sense.”
He says PFA is still trying to figure out “the most efficient” path forward. “It’s difficult to do early stage investments” to begin with, and PFA is “a bit reluctant” to do defense investments in private equity or venture capital, he said.
Earlier this month, EU member states requested that the European Commission come up with a list of proposals to boost private finance for defense. Commission President Ursula von der Leyen has since signaled that the bloc will do everything it can to free up capital, declaring that with “European values, democracy, freedom, the rule of law” now under threat, “nothing is off the table.”
Regulators in the U.K. have already made clear that existing sustainable investment rules don’t prohibit fund exposures to the defense industry. And in the EU, existing ESG rules emphasize disclosure rather than restrictions.
At the same time, many investors adhere to United Nations guidelines as well as principles laid out in other international conventions, which can stand in the way of defense exposures. The UN Principles for Responsible Investment acknowledges that asset managers are currently under pressure to reconsider policies, but says on its website that investors should continue to evaluate the impact on human rights and the risk of fueling civil wars and corruption.
AkademikerPension’s existing exclusion policy affects about 90% of European defense companies and basically all U.S. weapons manufacturers, Holst said. Members will be asked whether they want to lift that internal ban to free the fund to add defense assets. It currently allocates just $45 million to the sector, he said.
Asked whether the fund has any preference for U.S. or European manufacturers, Holst said he thinks “it’s obvious at the moment that most investments will go to the European industry,” based on what policymakers in the region are guiding.
Jenn-Hui Tan, chief sustainability officer at Fidelity International, said even the strictest ESG fund managers can buy defense assets, as long as they’re transparent.
“Clients will choose to make the decisions they make,” Tan said.
Loredana Muharremi, an analyst at Morningstar, said the expectation now is that there’ll be even “greater investment in these areas” going forward as the EU provides further clarification to support such allocations.
