According to the Institute for Economics & Peace, there are 56 active conflicts in the world, the greatest number since the end of World War II.[1] Increasingly complex geopolitics and ReArm Europe are keeping investors on our toes, analytically.
Our approach is nuanced, yet four points are prominent:
- We do not invest in companies which produce weapons banned by international conventions and certain local regulation.
- We may invest in conventional defence companies through specific investment strategies, but only after thorough fundamental analysis.
- In SFDR Article 9 funds, we do not invest in defence[2].
- For each of our funds, we provide investors with full transparency on our exclusions and analytical rationales pertaining to defence.
Active investing, strong risk awareness.
Many of our investment strategies integrate thorough sustainability assessments to identify, evaluate, and manage both risks and opportunities. This principle is at the core of our investment philosophy.
Moreover, we believe that investing can play an important role in fostering a more sustainable world, as well as a safer Europe. However, sustainable investors must remain aware of the intrinsic challenges of different sectors. The defence sector in particular, although a rewarding investment over the last three years,[3] comes with certain risks. The sector’s complexity, from the upstream to the end markets, often results in a lack of transparency and traceability. This can expose investors to legal and ethical challenges, such as corruption and violations of human rights, which can in turn represent reputational and regulatory risks. These risks are inherent to the defence sector. It is nothing new that it is difficult to ascertain who will use which weapons, against whom and how and when, and that it is impossible to guarantee that today’s ally will not become tomorrow’s adversary.
Steady principles, nuanced product range.
We have long had a strong and transparent framework in place for investment in, or exclusion of, defence stocks. Our framework is built for the long term. It adheres to solid, stable principles, while offering flexibility to navigate evolving environments.
Using this framework, we manage a range of investment strategies of various types – ranging from “traditional” strategies, to ESG integration strategies, to funds having sustainable investment objectives – and apply clear defence-related policies to each of them.
Since before 2006, we have excluded armaments banned by international conventions and certain local regulations, such as anti-personnel landmines, cluster bombs, depleted uranium weapons, chemical weapons, biological weapons and white phosphorus Candriam Exclusion Policy across all of our investments.
For conventional weapons, we apply a nuanced approach, offering investors a range of solutions to meet different requirements and risk appetites:
- Our “traditional” strategies may invest in issuers with exposure to conventional weapons.
- Some of our ESG-aware strategies (for example, certain Article 8 funds) may invest in issuers with modest exposure to conventional weapons, that is, companies which derive 10% or less of sales/revenues from production, trade, testing, or maintenance of conventional armaments or critical components /services for armaments.
- For our funds having sustainable investment objectives (for example, our Article 9 funds) and some of our ESG integration strategies (for example, certain Article 8 funds) this threshold drops to 3% of sales/revenues.
Having established an in-house sustainability analysis team in 2005,[4] we have the benefit of hindsight. As the world becomes increasingly complex, our conviction strengthens that the best risk control lies in applying strict principles while developing a nuanced understanding of each situation. This does not mean twisting the narrative to suit expediency, or to follow market trends. It means that we always supplement data providers’ information with our own analysis, and challenge any unclear or incomplete data by asking questions directly to the data provider and/or engaging with the company.
Balancing security with social and economic goals.
What do the aforementioned risks inherent in defence mean for investors in terms of exposure to defence bonds, or to the debt of any sovereign nation which invests in weapons?
For any sovereign issuer, the broad implications of defence spending must be considered. Is the nation a democracy or an oppressive regime? Does its defence spending contribute to national security in a way that does not starve education, healthcare, infrastructure, or jeopardise economic growth? Our multi-factor sovereign sustainability model evaluates, among many things, transparency, corruption, the quality of internal governance including procurement, military spending, conflicts, and external security.
At Candriam, bonds specifically dedicated to defence spending may currently be held in “traditional” portfolios and in ESG-aware strategies (i.e. Article 6 funds and certain Article 8 funds), as long as they adhere to our broader investment constraints. However, they are currently excluded from our funds having sustainable investment objectives (i.e. Article 9 funds).
Tomorrow?
As of 31 March 2025, twelve of the largest defence companies by market capitalisation are based in Europe, and thirteen in the US. Aerospace and defence represent roughly 4.5% of the MSCI Europe index, and 2% of the MSCI US index[5]. As we apply our approach in the current environment, we continue to rely on our tried-and-test processes, while remaining nimble and focusing on in-depth analysis. Accordingly, we will monitor the possibility of companies in various sectors expanding into defence-related activities, and constantly ensure the continued pertinence of our exclusion thresholds in light of risks.
Conflict-Affected and High-Risk Areas
It’s not just the defence business which is increasingly complex to evaluate from a sustainability perspective. A rapidly-rising proportion of companies have sales, sourcing, or operations in so-called ‘CAHRAs’. Their problem is simple arithmetic, really. In past decades, multinational companies had the luxury of avoiding conflict-affected areas. Not only is the number of those conflicts increasing, but some of these are now in regions with large economies -– Russia represents 1.9% of global GDP,* while Israel represents 0.5%. There’s more about these dilemmas in our case study, Sustainability on the Front Line.
[1] The IEP, Institute for Economics & Peace, an independent non-profit think tank. Global Peace Index 2024: Measuring Peace in a Complex World, Sydney, June 2024. (accessed 27 March 2025).
[2] In Article 9 funds, Candriam applies a 3% exclusion threshold on conventional armament, thus excluding companies that derive more than 3% of their total sales/revenues from conventional armaments.
[3] For the three years ended 31 March 2025, The MSCI European Aerospace index rose 151.31% versus 29.7% for the MSCI Europe index. Past performance is not a reliable indicator of future performances.
[4] Our record of sustainable investing dates from 1996.
[5] Source: Bloomberg