by Ophélie Mortier,
Chief Sustainable Investment Officer at DPAM


The War in Ukraine is a daily reminder of how precious freedom and democracy are, and how essential security is. Paradoxically, it is in this context that so-called sustainable ESG investments are experiencing a certain identity crisis. Indeed, almost unanimously, these investments exclude the defence sector because they do not finance armaments. Furthermore, while sector biases are not systematically comparable, the underweighting of the energy sector in a context of rising prices (and therefore relative outperformance) is also a constant in these investments.


Sustainable investments are generally not exposed to the defence sector for ethical reasons. Most European labels on the market require, in addition to the generalised legal exclusion of controversial armaments1, the full exclusion of weapons and armaments.

The current conflict brings the whole divestment versus engagement debate back into focus. However, it is highly unlikely that such investments will return to the issue of arms exclusion. Beyond financial performance, sustainable skills and the defence of values are equally important to these types of investments.


Europe has relocated strategic industries such as semi-conductors or telecoms to third countries in Asia, and now depends on states with disputable democratic standards. While climate continues to dominate ESG research, the pandemic had already brought social issues, and in particular employee’s safety, to the forefront. Today, it is the governance issue of respect for political rights and civil liberties that is being highlighted.

The “G” dimension refers to corporate governance and business ethics for corporates. Similarly, for countries and investments in sovereign bonds, this refers to institutions and democratic requirements.

Sustainable investments tend not to finance certain countries that do not respect minimum democratic standards or that are under embargo. However, most sustainable sovereign bond investments remain exposed to countries such as Russia or China, as traditional market indices do, and this calls into question the credibility of the responsible and sustainable approach.


Sustainable investments generally differentiate between the country (and the investment in government bonds) and the companies located in it. Thus, an investment in Russian government debt and an investment in a company located in Russia should be looked at separately. However, while the two are distinct, the line is not so clear-cut. The close link between state-owned companies such as Gazprom and the reigning dictatorship hinders most responsible investors.

However, the situation is rarely black and white. Several examples of investments in Chinese companies have demonstrated involvement in human rights controversies related to government policy despite the privatisation of the companies. The example of the American microprocessor manufacturer Intel apologising following the negative reactions to its letter inviting its suppliers not to source products or labour from the Chinese region of Xinjiang is telling in this respect. The situation is therefore complex, and the relocation of key operations is at the heart of the debate. Beyond the concern for sustainable strategies, we should also consider relocating European key industries to the West.


The rise in energy prices is detrimental to the relative performance of sustainable investments and could lead to a reallocation of these to so-called mainstream investments, with greater exposure to the energy sector.

However, this fear of a flow reversal is limited. On the contrary, the energy crisis and the geopolitical situation could lead to an acceleration of the energy transition, which is at the heart of the objectives of sustainable investments.

On the one hand, the latest IPCC report is unequivocal: climate change is a scientifically proven threat to human welfare and global health. On the other hand, several countries such as the UK and Germany have further strengthened their renewable-energy policies and projects.

The 6th Assessment Report on Climate Change (IPCC) shows a 14% increase in greenhouse gas emissions since the signing of the Paris Agreement in 2015. Even though signatories have committed to a 45% reduction by 2030, last year was a record year in terms of carbon emissions. To have a chance at limiting global warming to 1.5% by 2100, greenhouse gas emissions must peak by 2025.

Without debating the issue of a credible universal carbon pricing and potential taxes, this implies an aggressive decarbonisation and a real financing of the energy transition, i.e., reorienting financial flows towards the latter.

Today, the European taxonomy (and other smaller taxonomies that are emerging outside the European continent) is the only relatively effective instrument to achieve this objective, although it does come with its share of weaknesses in terms of investment opportunities. However, the extension to the other 4 environmental objectives should already partly correct this situation.


Sustainable investments are in a paradoxical situation today. On the one hand, the War in Ukraine reminds us of the importance of key values such as democracy, security, and freedom. Values that should be at the heart of a sustainable approach to SRI qualified investments.

On the other hand, the almost standardised exclusion of the defence and armaments sectors and the strong and generalised underweighting in the energy sector might work against this type of investments. We could see some relative and temporary underperformance. Therefore, we must remember that financial performance is just as important as the credibility of the sustainable value of these investments: Above all, sustainable investments aim to guide governments and companies toward inclusive growth and sustainable performance in the medium-to-long term.

European regulations, in particular the SFDR, are clear on this point: the so-called Article 9 (dark green) products of the SFDR classification put the sustainable objective ahead of any other objective, financial or otherwise. The reference framework remains the European Commission’s action plan for sustainable finance, i.e., financing a sustainable and inclusive energy transition. Scientific evidence also reminds us that short-term greed will not be beneficial and that it is important to constantly question the core values that companies and states promote or neglect. In the end, it is all about impact and value alignment.

1 Belgium was for example a pioneer with the so-called Mahoux law which forbids the direct and indirect financing of controversial weapons such as depleted uranium since April 2009. Since then, several countries have adopted laws forbidding the financing of depleted uranium munitions and armors, anti-personnel landmines and cluster munitions.


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