finews.ch typically does not cover the launch of a new exchange traded funds (ETF) on the SIX Swiss Exchange (SIX). However, this time an exception is warranted: there is a bigger story behind the product. On Wednesday, asset manager Wisdom Tree listed the ETF WDEF, focused on shares of European defense manufacturers, on the SIX.

Launched on March 11, the ETF is already trading on other European exchanges and has a weighting of more than 1 billion dollars. Its proprietary index tracks the performance of European defense companies, including manufacturers of civilian defense equipment, defense electronics, and space defense systems.

«Growing Demand from Swiss Investors»

Adrià Beso, Head of Sales Europe at WisdomTree, explains in the corresponding media release: «As governments re-evaluate their defense strategies and prioritize domestic capabilities, we are seeing strong investor interest in efficient ways to participate in this theme. Listing on SIX will enable us to meet the growing demand from Swiss investors and strengthen our commitment to investors in the region.»

The fact that the growing investor interest is likely to be correlated with the above-average performance of defense stocks is not explicitly mentioned.

Just a few months ago, it would have been inconceivable for established ETF providers to promote defense stocks so aggressively. Instead, the industry's stated goal was to present itself as «sustainably» as possible, highlighting products whose underlying asset – shares, bonds and others – meet specific environmental, social and governance (ESG) criteria.

Some Element of ESG Still Has to Be Part of the Mix

Until recently, there was a broad consensus that shares and other financial instruments of companies that earn their money from the production of war material had no place in the ESG universe. Accordingly, their names appeared on exclusion lists, alongside other so-called «hopeless» cases such as coal, alcohol or tabacco companies.

Even today, a hint of ESG ferver is still necessary. According to Wisdom Tree «the index attempts to exclude companies involved in controversial weapons banned under international law, such as cluster munitions, anti-personnel mines, biological and chemical weapons, and depleted uranium and white phosphorus weapons».

Attack on Ukraine Shatters Old Certainties

The belief that arms stocks could never be considered sustainable was first shaken by Russia's attack on Ukraine in 2022. At the time finews.ch quoted Hendrik du Toit, Managing Director of Ninety One Asset Management, warning: «I would be worried that the arms industry is sneaking in through the back door.»

An analyst report from Citigroup pointed in the opposite direction – and proved prescient in hindsight: «Defense is likely to be increasingly seen as a necessity that facilitates ESG as a business and the maintenance of peace, stability and other social goods.»

The SBA President's Order: Switzerland Must Regain its Ability to Defend itself

The debate subsequently cooled down somewhat: most providers decided to stick with the status quo, generally outlawing arms companies and, in particular, continuing to deny them access to the ESG universe.

However, the controversy resurfaced last fall. Speaking at Bankers Day in September 2024, Marcel Rohner, President of the Swiss Bankers Association (SBA), struck an unusually martial tone. He criticized Switzerland’s weakened ability to defend itself and called for the (re)establishment of a strong and credible army.

What Do the Banks Think of the Swiss Arms Industry?

When the Swiss arms industry subsequently complained in a newspaper report that it was becoming increasingly difficult for them to conclude transactions and open accounts with Swiss banks, the SBA felt compelled to issue a fairly balanced statement.

It stated, among other things, that the arms industry offers a wide range of products and services and that the topic requires «corresponding sensitization at the level of the individual customer». «At the same time, it must be taken into account that the existing ESG regulation allows for little individuality at individual customer level. The SBA advocates a differentiated and individualized assessment in line with the regulatory requirements.» It also emphasized that current ESG regulations leave little room for individual differentiation at the customer level. The SBA advocates for a more nuanced and individualized assessment within the bounds of regulatory requirements.

New Doctrine of the US Government, Arms Offensive in Germany and the EU

The debate flared up in March of this year. The decisive factors for this were probably the new US government's harsh attitude towards Ukraine and other allies, as well as the decision of the future coalition government in Germany to massively increase arms spending (and to do so, to override the debt brake), along with the accompanying EU rearmament offensive.

Wisdom Tree erkannt, which generally describes itself as a «global financial innovator» and in this case also as a «first mover», has also recognized these signs of the times «with the first ETF that truly offers access to the European defense sector». With the ReArm Europe plan (which is now officially called the «ReArm Europe Plan/Readiness 2030»), Europe, traditionally dependent on US defense companies, is now focusing on its own competencies, directing capital in the defense sector back to domestic companies, promoting innovation and strengthening Europe's industrial base.

Was the marketing department aware of the strong echoes of U.S. President Donald Trump’s new industrial policy in this statement? It could almost be seen as a subtle irony of history that the EU’s response to the Trump trigger mirrors his own approach.

Fallen Taboo, Lost Honeymoon

At he end of March, the editor-in-chief of finews.ch raised the question of whether the «defense taboo» in the ESG sector was starting to crumble.

In his commentary, he also stated that the «honeymoon» for ESG was over. In fact, the players in the sustainable investment segment have been battling headwinds from various fronts for some time. It is therefore not surprising that a shake-out process in underway in the industry.

Lots of Headwinds for the ESG industry

The once-strong inflow of new money into ESG products has dried up. Banks and insurers are pulling out of climate alliances, and companies are abandoning diversity programs that were previously seen as a core part of the «G» in ESG. Interviews with asset managers—once eager promoters of ESG investment solutions—reveal that this has become a «sensitive area» where every word is carefully weighed.

However, anyone assuming that all the lights will soon be extinguished in the ESG industry could be mistaken. After all, the players have repeatedly proven  to be very adaptable.

You can bet that it won't be long before other ETF houses - perhaps even with explicitly sustainable solutions - follow Wisdom Tree's example. With a triple-leveraged exchange traded product (ETP) on the Stoxx Europe Total Market Aerospace & Defense Net Total Return Index, the company stepped up the pace again in April.

Parallels with the Debate on the Sustainability of Nuclear Energy

Arms companies are no longer automatically relegated to the «dirty corner». Whether they will soon also receive an explicit sustainability label remains to be seen. Dissenting voices remain, such as the of Lichtenstein banker Patrick Kindle, who reaffirmed in an April interview with finews.ch that defense stock have no place in sustainable funds.

The controversy is set to continue, with the outcome still uncertain. It is reminiscent of the heated debate during the energy crisis as to whether the industry for the civilian use of nuclear power can be sustainable or not. The EU taxonomy has adopted a relatively pragmatic stance on the issue, but it has long failed to convince all stakeholders.