Asset managers under microscope over Israel investments

Israel and the companies that supply its war in Gaza have been under fire in recent months, and that pressure is starting to spread to the financial sector.

Baillie Gifford has become the central target of this growing campaign, with its sponsorship of literary festivals like Edinburgh Book Festival.

This weekend, Hay Festival dropped Baillie Gifford as a sponsor, with the literary gathering’s executive Julie Finch stating that the decision was made “in light of claims raised by campaigners and intense pressure on artists to withdraw”.

Now, City A.M. can reveal that dozens of environmental, social and governance-focused funds have been investing directly in companies supplying Israel’s military with weapons used during its ongoing retaliation to the October 7 Hamas attacks.

Over six hundred funds across 60 asset managers invest in companies that have seen UK factories protested and or institutions forced to divest over supplying arms and military equipment to Israel, according to data from Morningstar Direct.

Some 78 of these UK funds are classed as ‘sustainable’ by Morningstar.

The Baillie Gifford boycott received criticism for its broad terms, focusing on investment in companies that have commercial dealings within Israel, such as Amazon and Nvidia.

However, the asset manager did issue a statement on three companies which it identified as having problematic operations in the occupied territories, including Cemex, which supplies concrete for the construction of military settlements on the West Bank.

“We have been engaging with those companies. This work has been going on since the conflict broke out and in all three cases progress has been made,” a spokesperson said.

Now, asset managers are faced with a problem. As the campaign against Baillie Gifford rages on, which one of them will be next?

Sustainable funds investing in Israel’s military

Around 200 UK funds currently invest in defence company BAE Systems, including nine sustainable funds.

One fund is the Artemis SmartGARP Paris-Aligned Global Equity fund, and an Artemis spokesperson said it had not provided any engagement with companies within their portfolios to ask them not to supply weapons that will be used against civilians.

They added that the fund’s focus was on “investing in a diversified portfolio of stocks that meet the manager’s criteria for transitioning to a low-carbon economy, targeting a weighted average implied temperature rise lower than two degrees celsius”.

However, pollution created by the ongoing war in Gaza have been flagged by scientists as a serious environmental concern, with the climate cost of the first 60 days of Israel’s ground invasion of Gaza equivalent to burning at least 150,000 tonnes of coal.

“The military’s environmental exceptionalism allows them to pollute with impunity, as if the carbon emissions spitting from their tanks and fighter jets don’t count,” said Benjamin Neimark, a senior lecturer at Queen Mary, University of London.

The Artemis spokesperson added that it had not received any pressure to divest from its investment in companies supplying Israel.

Meanwhile, 41 UK funds, including two sustainable funds, invest in defence company Lockheed Martin, one being the UBS Global Equity Climate Transition fund.

Both Lockheed Martin and BAE Systems have faced protests outside their factories in recent months over their supply of weapons to Israel.

UBS declined to comment when asked if it had received any pressure to divest from companies that supply weapons to the Israeli military.

[Asset managers] could well be turning a blind eye to breaches in international law and human rights violations.

Louise Marfany, director of financial sector standards at Shareaction

Recent protests have also emerged against Eaton Corp in the UK, which does not directly produce weapons, but supplies parts for helicopters and fighter jets to the Israeli military.

Among the ESG funds that invest in Eaton, two are run by AXA Investment Managers, and an AXA spokesperson said the company only will not invest in companies that produce weapons banned by international treaties.

The spokesperson added that the company filters out production of white phosphorus weapons from its funds, but only for sustainable ones.

AXA IM explained that it selected companies for its Article 9, or ‘dark green’ funds, by choosing companies that demonstrate a positive contribution through the UN Sustainable Development Goals.

“Eaton is a global power management company doing business in 175 countries. Its solutions primarily facilitate the development of renewables and drive energy efficiency improvement, which contribute to UN SDG targets 7.1, 7.2, and 7.3 by enabling electrification and access to electricity,” a spokesperson said.

In December, over 600 protesters blockaded the entrance to an Eaton factory in Wimborne, urging it to end weapons, defence and supplies trading with Israel.

“The problem with any supply chain is you don’t know where their market is. You can sell something that goes somewhere that goes somewhere else,” Aegon’s Douglas Scott told City A.M, who runs a fund where one of the largest holdings is Eaton.

Aegon’s Global Equity Income fund is not allowed to directly invest in weapons production, and Scott said he would mention the issue around providing military parts to Israel when he went back to Eaton.