ESG investing is a complicated area with many ethical dilemmas and moral decisions to be made.
As the Israel-Hamas conflict has brought to light, companies that manufacture goods for war present one such dilemma. On one hand, listed stocks that manufacture weapons create products that literally kill people. On the other hand, without those manufacturers, countries like Israel could be over-run. Many countries would be left vulnerable if all investment in defence ceased.
Ethical investing is about you
For most funds in the ESG investing space, you have to prescribe to a fund manager’s ESG philosophy. More often than not they just exclude all stocks to do with war, with no nuance. However, this may not be the best approach or one that is right for you.
Nucleus Direct Indexing allows you to tailor your portfolio so it aligns with your ethical values and beliefs and doesn’t have a “one size fits all” approach to ethics.
Nucleus Direct Indexinghas a number of categories within each ethical screen to make the decision easier. For example, many choose to exclude the “War Worst Offenders” and “Nuclear Weapons”. This removes companies known to produce nuclear weapons, cluster munitions and landmines but leave the rest of the war stocks in the portfolio that are more aligned with defence. This would mean they own stocks like Boeing, but exclude stocks like Honeywell.
Nucleus Direct Indexing also allows you to include certain stocks and themes based on your ethical preferences and investment outlook. We have a specific tilt towards defence contractors, which adds stocks into your portfolio that are involved in defence.
One of our holdings is L3Harris, a US defence contractor that specializes in surveillance solutions, microwave weaponry, and electronic warfare. We expect it to continue to grow as the West confronts Russia and the Israel-Hamas conflict escalates. For some investors, they don’t want to own L3Harris, regardless of the outlook. For others, it is an acceptable investment. We can understand and accommodate both points of view.
Let me be clear, I am not promoting investing in war. However, I am raising the point that not all manufacturers of weapons are part of an evil industrial-military complex and you should choose what to include and what to exclude in your portfolio. Unfortunately, war is still an aspect of life and excluding every defence stock and making funding more difficult for this industry is not going to solve the problem.
Nucleus Direct Indexing ethical screens (exclude) regarding War
No Arms – Worst Offenders. This removes companies that are known to produce cluster munitions and landmines
No Arms – Any. This removes companies that are known to directly produce weapons or ammunition
No Nuclear weapons. This removes companies that are known to be involved in the production of nuclear weapons
Nucleus Direct Indexing ethical tilts (include) towards War
Defence contractors – This is a rules based approach to choosing defence contractor stocks. These are companies that are involved in the manufacturing of weaponry. We target 8 of the largest stocks globally, provided that they are listed in a developed market.
The problem with many ethical funds
The problem with many ethical funds is that they treat the world as black or white, with nothing in between.
It is easy to take the moral high ground of an ESG manager and exclude everything to do with War but often there is more to the situation as discussed.
We have had a number of investors that have repositioned and included a tilt towards defence contractors in their portfolios as they see this as a growth area.
Nucleus Direct Indexing has many investors who want to exclude gambling but include tobacco. And many that want the exact opposite. Others want to exclude oil and coal stocks but do want to own fast food companies. The majority of ethical funds don’t give you these options or the ability to customise your portfolio to align to your preferences. Many questionable sectors are either all in or are all out. We think investors deserve better options and deserve to choose how their money is invested.
Nucleus Direct Indexing’s unique offering
We have around 100 ethical, sector and asset class screens and tilts that allow you to take the top stocks in Australia or the World and then customise them based on your values and beliefs.
We are always innovating and we have the flexibility to create specific custom screens also.
Have a look at our portal to see more detailed information about each of our screens, and see what your portfolio might look like if you apply them.
If you would like to discuss investing, any of these ethical issues or the screens and tilts available you can book a call here.
