Ethical conundrums for charity investors

In recent years, investors have been forced to confront a formidable list of geopolitical events that still dominate today – the invasion of Ukraine, devastating wars in the Middle East, as well as the sobering reality of soaring global temperatures. This is in parallel with the emergence of ChatGPT, which has ignited the widespread adoption of artificial intelligence (AI) and a corresponding boom in financial markets.

As we move towards a more fragmented, multipolar world, charity investors continue to face the dilemma of aligning their financial goals with their charity’s values, purpose, and the interests of their wider stakeholders. Looking at some of the best performing sectors over the year to date, whilst semiconductors and communication services have dominated (+32% and +19% respectively), armaments (+45%) and tobacco (+26%) have generated strong returns, leaving investment committees with an unenviable challenge.[1]

Financing the defence sector: responsible or reckless?

Since 2022, awareness has grown of the defence industry’s role ensuring national security in an increasingly unstable geopolitical context. On 17 June 2025, the European Commission adopted the Defence Readiness Omnibus, committing up to €800bn in defence investment over the next four years.[2] UK Chancellor Rachel Reeves announced a commitment to raise defence spending to 2.5% of GDP by 2027,[3] while Germany – long bound by strict fiscal rules – unveiled a €400bn borrowing programme for its armed forces.[4]

It is therefore no surprise that the share prices of European defence companies have surged this year, buoyed by rising demand and expectations of increased future spending.[5] Echoing the dynamics of the Cold War era, defence investment has re-emerged as being in vogue: not only as a matter of national security, but also of strategic and economic importance. Against this backdrop, trustees have a delicate tightrope to walk, in developing robust investment policies that are suitably compliant without hindering the delivery of sustainable future returns.

So how should trustees balance this trade off? It often comes down to managing reputational risk and the charity’s specific objectives.

Indeed, the defence sector has been praised for its support of Ukraine but criticised for its exports to Israel. Ultimately, this decision rests with trustees to determine whether a sector aligns with their charity’s mission. Embracing the broad market universe might be appropriate for some charities, where it produces conflicts for others. A military charity’s ethical policy could differ considerably from one with Quaker roots, for example. No investment manager or adviser can decide this, but they can help trustees assess the financial materiality and consequences of these decisions.

It is also vital for trustees to understand the distinction between imposing ethical exclusions in portfolios and applying integrated ESG assessments of companies. While the former involves screening out sectors, typically on a revenue threshold basis, based on values or mission, the latter focuses on managing both financial and non-financial risks and opportunities.

It is notable that regulators have not barred investment in defence companies within sustainable funds. In March 2025, the UK’s Financial Conduct Authority (FCA) confirmed there were no regulatory grounds to exclude them from SDR-labelled sustainable funds, a view echoed by the EU’s reporting regime.[6] This has opened the door for UK companies such as BAE Systems and Rolls-Royce to be considered in a wider array of investment portfolios. Defence companies may well have a place in portfolios due to the higher yields, relatively low correlation to other sectors, and strong cash flows, which are supported by long-term government contracts.

Conversely, the risks of investing in the sector are well documented. Cyclical revenues and earnings streams, dependence on central government budgets, limited visibility over long-term contracts, and reputational issues such as corruption and allegations of price-fixing, can all contribute to investment uncertainty. Dr Linus Terhorst, a research analyst from defence and security think tank Royal United Services Institute, highlighted the structural barriers to growth in the defence industry, including complex procurement processes, long development cycles, skills shortages and heightened risks around data privacy and cybersecurity.[7]

While investing in the defence sector presents opportunities, it also carries risks. At Sarasin & Partners, we encourage a pragmatic and balanced discussion on defence, recognising that the ultimate decision to invest in the sector rests with the charity. Where defence exposure is permitted, our approach centres on identifying companies with compelling long-term thematic growth prospects and integrating ESG considerations thoughtfully into our analysis to ensure that all risks are appropriately reflected in valuations.

Technology at a moral crossroads

Similarly complex ethical questions arise when investing in the AI value chain. Since 2023, the ‘Magnificent 7’ (MAG7) – Apple, Microsoft, Alphabet (Google), Amazon, Meta, Nvidia and Tesla – have played an increasingly outsized role in shaping global equity market returns. Their dominance has been a recurring theme in our analysis, reflecting both the transformative potential of AI and the significant risks it brings.

While we have held exposure to six of the seven companies (excluding Tesla), a decision which has contributed positively to client portfolios, we have also carefully considered the associated risks: misinformation, deepfakes, bias, harmful content, and broader cyber and data security concerns.

We touched on this in our article focusing on the social risks associated with AI.

In September 2024, the World Health Organization reported growing evidence of technology’s impact on mental health, with several US states filing lawsuits against major technology firms for failing to flag harmful content and for algorithms contributing to anxiety, depression, and psychological stress.

Meta, the owner of Facebook, Instagram, and WhatsApp, is among those facing legal action from 33 states over its alleged role in a youth mental health crisis.[8] This raises a critical question: although investing in companies positioned to benefit from AI may enhance portfolio performance, are such investments appropriate for charitable portfolios?

Again, there is no definitive answer, and it is not one for us to give. Under the Trustee Act 2000, trustees have wide discretion over investments, encompassing both financial objectives and values-based considerations. For some charities, the red lines are clear; for others less so. The role of your investment manager is to help trustees understand and quantify the risks so that they can make informed decisions.

As shareholders in these companies, we also have a responsibility to ensure that companies have governance processes in place to ensure that AI is being used responsibly.

At Sarasin & Partners, we approach this in two ways: first, by integrating ESG considerations into our investment process, and second, by engaging directly and collaboratively with companies. While ESG is often dismissed as a tick-box exercise, we view it as essential, not only for assessing a company’s impact on people and the planet, but also for understanding how those impacts affect the sustainability of future returns and earnings. ESG is therefore about identifying areas of capital growth but also protecting shareholder capital.

Case study: Meta engagement and Sarasin’s ESG rating

Meta has been a central beneficiary of the AI trend for a number of years. As shareholders since 2023, we have engaged with the company on a range of issues. In October 2024, we coordinated a letter on behalf of a coalition of 36 investors (including some of our clients), representing $3.6trn in assets under management, which covered areas including:

• Human rights – commitment to conduct Human Rights Impact Assessments.

• Content, privacy and child protection – reporting on misinformation and data use, and child protection measures.

• Governance of AI – board oversight of online safety, user privacy, and content moderation.

Following limited responsiveness from company management, we downgraded our ESG rating for Meta from D+ to D- in February. This was to reflect the negative direction of travel and ensure that the associated risks with the company were incorporated into our valuation model and investment decisions.

Our engagement has remained ongoing. In May 2025, we pre-declared our votes at Meta’s AGM, voting against five of its directors and supporting five shareholder resolutions on efforts to promote ethical AI. We remain committed to engaging with these technology companies to drive progress on AI ethics, data governance, and ensure accountability to shareholders.

Is a reconciliation possible?

We are witnessing a turbulent shift in the geopolitical landscape, where reputations can be tarnished in a single tweet, and charity investors face growing scrutiny to ensure their portfolios reflect their core values. Since the inauguration of President Trump, these dilemmas have only intensified, with the evolving landscape necessitating regular review and reassessment.

One of the biggest debates in the investment industry is whether divestment is the best route to achieving desired outcomes. Should charities refuse to invest in companies deemed unethical? Should they apply blanket exclusions to certain sectors? Or should they assess companies individually?

We believe the discussion is more nuanced. While the defence industry has attracted significant attention this year, it represents only around 2.5% of the global equity market – a reminder to be proportionate when focusing on a relatively small part of the investable universe. We are open to exploring all opportunities, provided that we believe they can deliver our clients long-term capital growth and ESG risks are appropriately reflected in valuations and client portfolios. Ultimately, this is underpinned by our belief that responsible investment is just as much a moral choice, as it is an economic and financial choice too.

[1] Bloomberg, to 30/09/2025
[2] https://defence-industry-space.ec.europa.eu/eu-defence-industry/defence-readiness-omnibus_en
[3] https://commonslibrary.parliament.uk/uk-to-spend-2-5-of-grossdomestic-product-on-defence-by-2027/
[4] www.reuters.com/business/aerospace-defense/germany-raisedefence-spending-35-gdp-by-2029-sources-say-2025-06-23/
[5] https://global.morningstar.com/en-gb/stocks/whats-next-europeandefense-stock-rally
[6] https://www.fca.org.uk/news/statements/our-positionsustainability-regulations-and-uk-defence
[7] www.rusi.org/explore-our-research/publications/insights-papers/are-esg-standards-scapegoat-stalling-defence-growth
[8] www.theguardian.com/technology/2023/oct/24/instagram-lawsuitmeta-sued-teen-mental-health-us

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