ESG fund managers who have faced years of poor returns are adjusting their strategies to include defense investments, which have shown significant profitability recently.

Following Russia’s invasion of Ukraine in 2022, sustainable funds in Europe have increased their allocation to aerospace and defense stocks by 37% for actively managed funds and 67% for passive products. This shift is a turnaround for a market segment that had previously avoided such investments.

Previously, ESG investors would have dismissed defense stocks, but now they are reconsidering as these assets are outperforming the market significantly. Aerospace and defense indices have shown strong growth in comparison to other sectors, attracting interest from ESG funds.

Various defense companies in Europe, such as Rheinmetall AG, Leonardo SpA, and Lockheed Martin Corp, are now included in numerous ESG funds due to their lucrative performance. European defense manufacturers have recorded substantial gains in their stock prices in recent months.

The trend of fund managers adjusting their mandates to maximize returns is not new. The performance of defense stocks is likely to attract more investors looking for profitable opportunities, leading to a reassessment of sustainability criteria within funds.