The war that Russia instigated with Ukraine is controversial on numerous levels, and that includes some investment implications.
For example, the conflict is prompting some fund managers and market observers to say that defense stocks should be added to environmental, social, and governance (ESG) funds. For years, civilian firearms manufacturers and producers of weapons of war have been among the most obvious exclusions from scores of traditional ESG funds, but the war in Ukraine is altering that thinking.
Indeed, the new view that defense companies make for credible ESG stocks simply because they’re providing products to Ukraine to stave off Russian aggression is controversial, but investors can avoid that controversy with the right ESG products, including the SPDR S&P ESG ETF (EFIV).
“There is a lot of emotion clouding the debate and not necessarily rigorous analysis,” Vicki Kalb, the London-based head of ESG research for Europe, the Middle East, and Africa at UBS, said in a recent interview. “The ESG issues that tend to get attention tend to resonate emotionally.”
For its part, EFIV, which tracks the S&P 500 ESG Index, allocates just 6.7% of its weight to industrial stocks, making that group the exchange traded fund’s sixth-largest sector weight. Companies with expansive defense exposure, such as Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), are not among EFIV’s member firms.
In the current environment, EFIV’s lack of exposure to defense stocks is relevant because it indicates that neither the fund nor its index are making arbitrary decisions based simply on a war.
As UBS’s Kalb notes, there’s already ample confusion surrounding what is and isn’t ESG investing, and unless a fund has a dedicated religious mandate, ESG investing “isn’t a moral judgment.”
Arguably, a mutual fund or ETF, particularly a passive offering such as EFIV, rushing to add defense stocks based on geopolitical conflict is likely to add to the confusion surrounding this investment. ESG fund sponsors and index providers should be looking to avoid that confusion because numerous surveys of advisors and professional investors confirm that one of the biggest hang-ups with ESG is lack of clarity.
“If weapons makers are considered environmentally and socially responsible now, then why not add oil and gas makers – long criticized as the antithesis of ESG – to the category as well?” according to ZeroHedge.
Bottom line: EFIV offers investors a straightforward approach at a time when that trait is highly coveted in the ESG arena.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.