Gone are the days when the investment community tried to avoid stocks in defence companies due to environmental, social, and governance (ESG) concerns, new research has revealed.
A new study conducted by Associate Professor Harminder Singh, a finance researcher at Deakin Business School, has revealed that investors, including super funds, have shifted their money into the defence sector since the beginning of the Russia-Ukraine conflict as the financial incentives have increased, ultimately reframing ethical considerations.
Commenting on the findings, Associate Professor Singh said he uncovered that investors’ ESG considerations had also changed over the course of the war as some sectors that might’ve been viewed as problematic took on a more sustainable role.
“The Russia-Ukraine war has meant many countries are moving to invest in their sovereign defence capabilities. Countries want to be able to defend themselves in case there are wider ramifications from the conflict,” said Associate Professor Singh.
“This makes stocks in the defence sector more appealing for investors. With more government money pouring in, there are more investment opportunities and the potential to earn greater stock returns,” he explained.
Associate Professor Singh said that while the prime motive for the changing investor appetite was detected in profit, he also witnessed a corresponding shift in ESG considerations that allowed this switch to become publicly palatable.
“Investing in defence stocks can now be reframed in the more acceptable context of national security and community safety.”
Associate Professor Singh also detected a similar shift in the energy sector, where a gap in the market had been created following the imposition of sanctions on Russia as the world’s major oil exporter — a gap that he explained needed to be met.
“This means other countries are developing their own alternative energy projects, offering the opportunity for greater investment and stock returns,” Associate Professor Singh said.
Like defence, ESG perceptions are also undergoing significant change in the energy sector as global pressures swift.
“This investment trend towards the defence and energy sectors might stay for at least a couple of years, depending, as time tells, whether it is the financially fruitful move that investors hope.”
