🧠 Exclude weapons?

Should you exclude weapons from your investments?

The instinctive answer: yes, obviously, we don't want to finance war.

Not wanting to invest in weapons is a strong conviction, but what exactly are we referring to?

Following your questions on the difference between convictions and values, I have decided to launch a series to break down the topics that divide opinion in responsible investing. The goal: to give everyone the tools to identify and validate what suits them, in order to invest or save in an aligned way.

First episode: weapons.

• What is the consensus and what is generally excluded?

• What criteria do those who make distinctions use?

• How do you check what a fund really does?

Feel free to reply directly by email if you have feedback following this edition.

What is the consensus and what is generally excluded?

Some weapons leave no room for debate, even if you accept the principle of national defence. Here are the three categories that are generally excluded:

Important nuance: Civil nuclear power (power plants) is still divisive. The EU classifies it in its green taxonomy (energy transition), but many funds exclude it entirely.

Let's take a well-known French defence company like Thales: it does not manufacture controversial weapons, it operates within a strict legal framework, its main clients are democracies.

So why do some funds still exclude it?

1. The risk of normalisation.

Accepting conventional defence means accepting that companies profit from armed conflicts. Even within a NATO framework, even for "legitimate defence", war remains organised and deadly violence. Financing this industry makes it acceptable, ordinary, a sector like any other, when it is not.

2. The risk of repression

Technologies developed for military purposes (surveillance drones, recognition systems, tactical AI) do not stay confined to battlefields. They can be diverted to repressive uses, including by democratic regimes. A technology presented as "defensive" today can become offensive tomorrow, or feed mass surveillance.

3. Ethical consistency.

If we refuse tobacco or certain pesticides because they kill, how can we accept weapons, even "defensive" ones?

The distinction between offensive and defensive is often unclear on the ground: an air defence system can protect civilians, but also cover questionable military operations. That's why some funds draw a clear line: 0% weapons, whatever the form. These organisations consider that the only way to be consistent is to refuse all financing, direct or indirect, of this industry.

Other managers make more nuanced distinctions. Which becomes difficult to ignore when you ask the question the other way: if nobody finances defence, who protects us when we need it?

And that's where the analysis becomes particularly revealing of the different philosophies at work.

What criteria do those who make distinctions use?

For managers who do not exclude all defence, there is no uniform grid, but several criteria regularly appear in their policies.

Criterion 1: Type of activity and weapons

First distinction: controversial weapons (already excluded, see previous table) vs conventional weapons vs dual-use technologies.

Conventional weapons: Standard military equipment (armoured vehicles, air defence systems, conventional ammunition) that are not banned by international conventions.

Dual-use technologies: Equipment that has both civil and military applications. For example, radars used for civil and military aviation, or cybersecurity systems for certain companies and States.

Let's take Thales as an example, which mainly manufactures defence systems, cybersecurity and equipment with civil and military applications.

One fund may judge this exposure acceptable, while another may exclude it because of the risks linked to the defence sector (risks of normalisation, repression, ethical consistency).

Criterion 2: End clients and respect for human rights

Funds look not only at what is manufactured, but to whom it is sold and in what context.

Questions asked when creating a fund/ETF:

• Does the company respect embargoes (bans on selling to certain countries decided by the UN or EU)?

• Does it sell to States accused of serious human rights violations?

• Does it have a reliable process to verify that its equipment will not be diverted to problematic uses?

If we return to Thales: it operates under the control of French and European authorities, who decide to whom it can sell. One fund may judge this framework sufficient, but another may consider that even within this framework, the exposure remains problematic.

Criterion 3: Weight of defence in activity

Here the question is to what extent defence weighs in the company's activity: is it marginal or is it the core business?

To illustrate this criterion: let's take a steel company. If 60% of its steel is sold to the weapons industry, its ESG profile will be very different from a company that sells 60% of its steel to the textile industry. Same activity, but very different clients.

Criterion 4: Governance and transparency

This criterion assesses the company's reliability on its practices:

• Does it have a history of scandals (corruption, illegal sales to countries under embargo)?

• Does it demonstrate transparency on its arms sales and clients?

• Does it publicly commit to respecting international conventions on human rights?

A transparent company with good governance will be judged less risky than an opaque company or one that has bypassed rules in the past.

What this means:

Two ESG funds can reach opposite decisions:

• Fund A may refuse all exposure to the defence sector, whatever the nature of the activity

• Fund B may accept certain companies that respect international conventions, sell within a controlled framework, and maintain transparent governance

Each fund sets the cursor at a different place according to the values and policy of the house.

How do you check what a fund really does?

Let's imagine you are starting and want to begin with an ETF replicating a world index, but you would prefer to add a filter for responsible investing to exclude what does not match your values.

Three ETFs are in the running after checking major criteria like liquidity, fees, tracking error, dividend policy, etc.

Check 1: The SFDR document (sustainability)

WHAT to look for:
The methodology, how the fund defines its sustainable investment policy.

WHERE to find it:

• Google: "[Fund name] SFDR" or "[ISIN] SFDR"

• Or on the manager's website, "Documentation" section of the fund

• Document name: "SFDR Disclosure" or "Article 8/9 disclosures"

HOW to read it:
Open the PDF, search (Ctrl+F): "exclusion" or "weapons" or "defense".

Example of what you might find:
"Exclusions on controversial weapons, nuclear weapons, conventional weapons, civilian firearms."

WHY this document:
It is the only document that details precisely what is excluded. The prospectus (300-500 pages) is too long and general, the KID (2-3 pages) is too brief.

Time needed: 5 minutes

Check 2: Check the complete list of positions

WHAT to look for:
The complete list (not just the top 10) of companies held.

WHY the top 10 is not enough:
Defence companies rarely have enough weight to be in the top 10 of a world fund.
They can be present at 0.5% or 1% of the portfolio without appearing in the top 10.

WHERE to find it:

• ETF provider's website: "Complete composition" or "Full holdings" section (sometimes downloadable)

• Or contact your adviser directly: "Can you provide me with the complete list of positions in this fund?"

HOW to read it:
Search (Ctrl+F) in the file: "Thales", "Dassault", "Lockheed", "Northrop", "BAE", "defense", "aerospace & defense".

WHAT YOU CHECK:
Whether there are companies you absolutely do not want to finance with your savings.

Time needed: 5-10 minutes.

Check 3 (optional): The ETF provider's ESG policy

WHAT to look for:
The manager's general policy on all its funds and ETFs.

WHERE to find it:
Google: "[Manager name] Responsible Investment Policy"

HOW to read it:
Look for the "Sectoral exclusions" or "Controversial weapons" section.

WHAT YOU FIND:
The general rules: which weapons are excluded, which thresholds, which international conventions are respected (Ottawa, Oslo).

WHY this document:
To understand the provider's overall approach: is it seriously committed, and if so, how?

Time needed: 10 minutes (optional)

To conclude

Refusing weapons: is it defending peace, or disengaging from its protection?

I know the question may seem abstract and like a purely intellectual exercise, but it is genuinely relevant at a time when geopolitical balances are shifting before our eyes and Europe is once again talking about rearmament as a vital necessity.

What is certain: knowing where you place your cursor is the condition for acting with consistency.

I hope this edition has given you the keys to better understand the stakes around weapons in finance, and above all, to check that the funds in which you invest put your money at the service of your values and convictions.

Take care,
Nessrine

P.S.: Thank you to Pauline for asking her question about the difference between convictions and values, this edition was directly inspired by that feedback. Feel free to reply to this email with topics you would like us to explore.

My book is a Fnac Favourite (Coup de Cœur Fnac)! To order it, click here.

Important reminder: This content is for educational purposes only, not investment advice. Please do your own research before investing. Remember that all investments, including ETFs, carry risks of capital loss.