“Jingoism” describes patriotic fervour for warfare and weapons among enthusiasts unlikely to experience their effects first hand. The term derives from a Victorian ditty penned following Russian military action in eastern Europe. It went like this:
“We don’t want to fight, but by Jingo if we do, we’ve got the ships, we’ve got the men we’ve got the money too!”
This is the message of many politicians and pundits in western Europe at present — but with a twist. Western Europe does not have the arms or personnel to resist Russia confidently without US support. This can no longer be relied on. Hence, a rush to find money to pay for domestic capability.
Is it moral to invest in weapons? This is an important question for private investors, albeit that a push in the UK to redefine defence stocks as ethical investments focuses on financial institutions.
Campaigners, including more than 100 Labour MPs and peers, have trained their sights on banks and retirement savings groups such as Nest and People’s Pension. Their broader targets are environmental, social and governance standards that discourage investment in armaments on ethical grounds.
I am sceptical about ESG. This combines disparate, unaligned elements in one big category error, in my view.
I believe instead in the pragmatic ethics that make it easier to live with oneself. No carve out should apply to defence shares. Historically, they have been seen as “sin stocks”, alongside tobacco and gambling equities.
I hold weapons stocks indirectly via index funds and directly in the form of shares in BAE Systems, the UK’s main defence contractor. The current debate about ethics made me weigh the justifications for this.
Conventional ethics, in world religions and elsewhere, are underpinned by The Golden Rule: treat others as you would be treated yourself. This precludes lobbing explosives at people you disagree with.
The so-called “Just War Theory” provides greater comfort. This is rooted in Roman and Christian philosophy, but is “a common manifestation across cultures,” according to David Whetham, professor of ethics and the military profession at King’s College London.
A “just war” is defined as one with a just cause, fought under legitimate authority with a reasonable chance of success. Destruction should be proportionate to how greatly it advances your aims.
The Just War Theory broadly legitimises the armaments industry. You cannot contemplate fighting a just war — western European nations jointly resisting an invasion of Poland by Putin’s Russia, for example — unless you have the means to do so.
Democratic nations also require well-equipped armed services for individual self-defence. As Professor Whetham puts it: “The minimum requirement of a state is that it can protect its people.”
It is on that basis that I am comfortable holding defence stocks. I still distrust Jingoism. This paved the way to the horrors of the first world war, whose victims included my shell-shocked grandfather and a great uncle gassed at Ypres.
I would feel even happier if UK politicians currently cheerleading for the defence sector were offering reform in return for ethical reclassification.
The government could, for example, break with the past and stop granting licences for exports of armaments to repressive states. These include Saudi Arabia, which bombed Yemen with warplanes supplied by BAE. The authorities could also crack down harder on wrongdoing they have not rubber stamped. In the past, this has included bribery and supplying security products, such as CS gas, to states intent on crushing legitimate protest.
The UK should meanwhile make greater efforts to retain defence businesses and technologies whose development taxpayers have helped finance. It beggared belief that then-prime minister David Cameron was sanguine when continental defence giant EADS tried to take over BAE in 2012. Thankfully, the deal foundered. Unfortunately, the acquisition by US private equity group Advent of UK defence groups Cobham in 2020 and Ultra Electronics in 2022 went ahead.
Aimie Stone, chief economist of industry Group ADS, thinks foreign bids for the UK’s digital defence start-ups may be seen as the next iteration of this trend. Such bids should be resisted, I believe.
Ministers must meanwhile streamline cumbersome defence procurement. The relationship between the UK Ministry of Defence and BAE too often resembles a loveless marriage, albeit that the partners are forced to stay together for the sake of the generals rather than the children. Resulting failures have included the Nimrod MRA4 aircraft programme, cancelled after costs spiralled over £4bn.
The backdrop is rising expenditure that has temporarily turned European defence into a hot sector. Shares are up by more than 40 per cent this year. Deutsche analyst Christophe Menard has calculated that an increase in spending from 2 to 3 per cent would increase sector sales by 7 per cent and earnings per share by 10 per cent.
My reservation is that any business dependent on state patronage has a problem customer. Unfavourable terms will recur. So will blame shifting. To me, BAE now looks expensive at an uncharacteristically steep forward price/earnings ratio of some 20 times, according to S&P Capital IQ data. It looks particularly so given that the company depends on the increasingly undependable US for half its revenues.
The risk that western Europe will have to disentangle its defence capabilities from those of the US remains in a long tail of low-probability outcomes. But that risk is moving up the scale.
Complicated politics. Complicated ethics. No one-size-fits-all ESG screen applies any more. But investors should resist Jingoistic pressure to embrace the defence industry unconditionally. They still have a duty to influence conduct for the better.
Jonathan Guthrie is a journalist, adviser and a former head of Lex. Jonathanbuchananguthrie@gmail.com
