Recent research from the Justice Company has found that out of 100 of the top Article 8 UCITS equity ETF’s, 59 retain exposure to conventional weapons despite their stated commitments.
The firm analysed 100 Article 8 UCITS equity ETFs from large asset management houses, with weapon screening qualifications assessed from index methodology documentation.
Because indices exclude “controversial weapons” such as biological or chemical weapons, while placing no limit on conventional military equipment, some companies could slip into these funds that were at odds with the ESG label.
These include major defence companies such as Rheinmetall and BAE Systems, which are not automatically excluded from Article 8 ESG funds. For example, Rheinmetall was a top 20 holding for one fund that styled itself as “enhanced ESG”.
See also: HANetf positions European defence ETF for Article 8 move
On top of this, a majority hold meaningful positions in fossil fuel-related industries, which had managed to earn high ESG scores on compliance and governance despite their environmental activities.
On average, the Article 8 UCITS equity ETFs had an average of 1.6% in energy stocks, compared with an MSCI World Benchmark of 3.78%.
However, 15 of the 100 funds had the same or greater exposure to oil and gas companies as the benchmark.
Almost half of the sample (47 funds) had above-benchmark weight in materials, including mining, metals and chemical companies, the research also found. A handful held almost 10% in mining and chemical companies. In total, 54 of the 100 funds had a “meaningful” exposure to energy and materials stocks (defined as 5% or higher).
Jonny White, senior adviser at the Justice Company, said: “Investors who choose Article 8 funds believe they are making a responsible choice, which they are, but only on the narrow criteria the funds are actually designed to meet.”
On top of this, White added that the Article 8 ETF universe is reactive, with companies getting excluded only when data providers have assessed any controversy as sufficiently severe.
The report also noted that this discrepancy is heightened when Paris Aligned Benchmark funds are factored in. These funds mandate a 50% or more reduction in carbon intensity, reliably excluding most fossil fuel companies, but have no restriction on weapons beyond “controversial ones.”
This means these funds can claim zero exposure to a company like Shell, while still having exposure to a company like Rheinmetall that investors may be totally unaware of.
The question investors should ask is not whether an ESG fund excludes controversial weapons, White said, but whether it excludes companies that manufacture weapons used in active conflicts, or that profit from conflict.
“On those questions, the Article 8 universe is largely silent,” he added. “That silence is not neutral; it is a choice.”
See also: 94% of investors consider defence stocks ESG friendly
