There are some stocks most investors would never consider adding to their portfolio. Defense stocks make the list. Yet, changes in narratives, economic structures, and the nature of technology could be altering the status of defense stock.
Firearms, tobacco, adult entertainment, gambling—these are all remarkably stable stocks that often prove lucrative at times of crisis, because the products they promote are highly addictive, exploitative, and harmful. The list of “sin stocks” can be expanded to cover even more ethically disturbing businesses: private (for-profit) prisons, Big Oil, Big Pharma, mining companies, the list goes on.
And then there are defense stocks. Since Russia’s invasion of Ukraine, shares of major American defense companies have jumped, with Lockheed Martin and Northrop Grumman seeing a 20% price increase since. The number of global deals made by private equity and venture capital investments last year were double the average annual amount between 2014 and 2019. As the war in Ukraine continues and Sino-American relations deteriorate, analysts predict a sustained outperformance of defense stocks. Yet, their commercial possibilities aside, other forces are relieving the sinful connotation of defense stocks.
Just over a year ago, war stocks were still somewhat taboo for investors, given their destructive social and environmental implications. Today, the argument is different. As Latvian deputy prime minister asked during an interview with the FT: ¬“Is national defense not ethical?”. Similarly, how could helping Ukraine be considered immoral?
Defense lobbyists argue weapon stocks positively contribute to “social sustainability under the ESG taxonomy”. Consequently, some European Union members discussed whether weapons could fit certain guidelines so as to be listed as ESG assets. Nations such as France are calling for a ‘war economy’ footing for defense contractors and, further, encouraging the creation of more European investment funds in defense to strengthen the financial structures supporting production capacity and stock build-up.
Another argument lies in the very nature of certain economies, such as the American economy. The U.S.’ defense industry is profoundly ingrained in the American economy, to the extent that Noam Chomsky has claimed that the military-industrial complex—that is, the military establishment and the industrial production of weapons and other supplies—is not specifically military, but “just the industrial system”, “the core of the modern economy”.
Although Chomsky’s claim needs revision, the military-industrial complex is not sustained solely by its (in)famous top-five contractors (Lockheed Martin, Boeing, Raytheon, General Dynamics, and Northrop Grumman), but is instead supported by tens of thousands of contributing companies. Thus, the ethical difference between investing in, say, Boeing, Woolrich, Hewlett-Packard, Caterpillar, or John Hopkins University is becoming a matter of mere degrees.
Furthermore, governments all over the world have increasingly been emphasizing the need for dual-use technologies—or technologies that can be used for civilian and military purposes. The ubiquity of technology in civilian, commercial, industrial, and military sectors integrates these sectors to the extent that no sector can be effectively isolated from the other.
Indeed, the war in Ukraine is in large part being fought through the weaponization of (commercial) digital technology: drones, deepfakes, Telegram, Starlink and ISS satellite services, to name a few examples. Every Big Tech firm—Google, Amazon, Microsoft, Meta, Twitter and YouTube—has weaponized its tech services in an effort to help Ukraine fight Russia.
As increasing military involvement becomes normalized or even imperative, both on a public and private level, we can expect the stigma around defense stocks to dissipate. Yet the fact that the military is so complexly intertwined with most aspects of the economy means a certain proximity with the state is necessary to understand the implications—personal and public—of these investments.
As for the ethical part of defense stocks, the complexity of the subject should not be an argument used to escape the question of whether investing is ethical or not. Quite the contrary, the very destructive means and ends to war should make the decision to profit from it a very difficult one.