In a recent joint statement the Investment Association and the Treasury argued that investments with an environmental, social and governance (ESG) mandate can invest in the defence sector. This call was also heard across Europe, including the Dutch Defence Minister, who called on pension funds to invest more money in the arms industry.

Triodos Bank does not invest in weapons, never will, and believes that the entire financial sector should refrain from doing so. Sustainability researcher Federica Masut explains why investing in weapons should not become normal.

It sounds so logical: don't invest in tools that can cause death and destruction. But the Russian invasion of Ukraine has reignited a long-running debate in the financial sector in recent years. Should financial institutions invest in the arms industry or not? For Triodos Bank, the answer is clear: one of the most important exclusion criteria that ethical banks have in common is a clear stance against weapons. Not only against certain weapons, which some financial institutions opt for, but against all weapons.

Weapons undermine quality of life

Triodos Bank has always had this view, says Masut: "As a bank, we want to contribute to a society that promotes people's quality of life with human dignity at its core. Financing weapons is at odds with that mission. Armed conflict (wherever, whenever, and for whatever reason) undermines quality of life and takes a huge toll on people and nature in conflict zones."

That's why Triodos Bank doesn't finance weapons. In our investments in listed shares, for example, we completely exclude the defence industry. In addition, we carefully screen companies in high-risk sectors for direct and indirect involvement in arms production, distribution and/or services. "In short, we have a zero tolerance policy," Masut said. "We call on other financial institutions to (continue to) do the same. We should be using financial resources for positive change, not to feed a culture of violence and conflict."

Perverse incentive

But don't countries have the right to protect themselves and guarantee the safety of their citizens? That's not what Triodos Bank's position is about, says Masut. "Where there are already conflicts, governments are in direct contact with arms manufacturers. That is how it should be, in the case of democratically elected governments. It is also up to democratically elected governments whether or not to invest in weapons."

"For financial institutions, it's a completely different story. For them, investments in the arms industry are mainly a way to profit from products that are currently in high demand. In other words: to profit financially from war and violence. That is a perverse incentive that we, as a sector, should stay far away from, also for our customers."

No transparency or control

According to Masut, there is another important reason for financial institutions not to invest in weapons. "As a financial sector, we have no insight into or influence on what produced weapons are used for," she explains. "So we really only invest in the growth of the arms industry and their profits, not in solving or helping with a particular conflict." This is partly due to the fact that the trade in arms is far from transparent and poorly controlled. Currently, only a few countries in the world have policies that guarantee transparency about the export of weapons. The international arms trade is also highly susceptible to corruption.

On top of that, obsolete weapons can be reused via second-hand markets for purposes that may be a lot more shadowy than protecting civilians. Financial institutions have no insight or influence on this either. "And that's another reason why we should stay far away from it," Masut said.

Unethical investment

But since the outbreak of the war in Ukraine, several financial institutions have indicated that they are willing to invest more in the arms sector. And several European countries have significantly increased their defense spending.  For example, a report by the GABV shows that at least $1 trillion was invested in the arms industry globally between 2020 and 2022. At the same time, the share prices of arms manufacturers soared. To give an example, after the most recent escalation of the Israeli-Palestinian conflict, the market value of some of the largest U.S. arms manufacturers increased by about $23 billion.

According to Masut, this makes it all the more immoral to invest in weapons now. "Investors need to ask themselves: what kind of investor do I want to be? Those who invest in weapons now are likely to achieve a good return in the short term. But then you profit from war and violence. We, and many with us, believe that investing is more than just returns. It's also about taking responsibility and being intentional, to make money work for positive change. Investing in weapons is simply a no-go."

Guarding against standardisation

And there is another important reason why investing in weapons now is a bad and even dangerous idea, Masut continues: "What we have to guard against is a shift in norms. That it will become normal to invest in weapons. That it is no longer questioned, even in times of peace. If we're not careful, it could just go that way."

"Investing in weapons means profiting from violence and destruction. That should have no place in the financial system that we want to build together," she concludes. "Especially in these times of turmoil and uncertainty, we as a financial sector must stick to our core principles and a positive vision of society. Weapons are not and never will be."