ESG funds in Europe could drive as much as $119 billion in flows into the aerospace and defense sectors, according to a note by Morgan Stanley analysts.
Currently, the EU region is witnessing an easing of restrictions on investments into the defence and aerospace sectors, on the back of weakening ties with the US and the ongoing Russia-Ukraine war.
“Any potential exclusions easing would focus on conventional and nuclear weapons,” the note said. “A full-scale easing of exclusions could drive significant flows.” However, it cautioned that the easing is unlikely to be “full-scale,” especially in the case of weapons such as biological weapons.
The note added that there is “concrete” evidence that Europe is taking steps to ease investments in the aerospace and defence sectors, crucial for the region’s security given the Trump administration’s refusal to pick up Europe’s defence tab.
Fund managers in the UK and Germany have been increasing their exposure to the sector, while Amélie de Montchalin, Minister Delegate for the Budget and Public Accounts in the French government, said last Sunday in a television interview that current regulations make it difficult to divert lending away from companies seen as problematic under ESG aspects. This makes it hard for banks to use their deposits to loan money to arms manufacturers.
“We could ask ourselves whether we should change these exclusion rules,” Montchalin said. The barriers for now are “that in the name of corporate social responsibility principles, ESG basically, a certain number of financial players like French banks or insurers have excluded defence industries from their savings products.”
