Sustainable investors hold their ground as energy, defence stocks surge

Business Times

11 hours ago

[SINGAPORE] Regional wars, tariff threats and the US' pro-fossil fuel policies have sent defence and energy stocks soaring in 2025, but not all is lost for investors committed to sustainable and responsible investing, experts told The Business Times.
Markets were closed on Jun 22, when US President Donald Trump ordered an attack on Iranian nuclear sites, but investors are bracing for a further spike in oil prices and rush to safe havens.
The S&P 500 Energy sector index had risen 8.56 per cent month on month as at Jun 20, compared with the S&P 500's 2.11 per cent month-on-month gain. In Asia, several energy stocks rose after Israel launched air strikes on Iran on Jun 13, sending Brent futures up by US$5 to US$74 per barrel.
Singapore-listed energy players such as Rex International and RH PetroGas surged more than 6 per cent at market open on Jun 16 after the strikes.
The MSCI World Aerospace and Defense Index had an even larger surge, and was up 33.45 per cent year-to-date as at May 31.
Comparatively, the MSCI World Socially Responsible Investment (SRI) Index has underperformed, rising 3.26 per cent year-to-date as at May 30, 2025, compared with the MSCI World index's 5.18 per cent year-to-date increase.
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More than half (56 per cent) of global investors believe that Trump's pro-fossil fuels and anti-clean energy agenda will slow the net-zero transition, indicated asset management firm Robeco's fifth annual Global Climate Investing Survey 2025 released on Jun 3, 2025.
'Clearly, the world is currently facing a tremendous amount of uncertainty, which affects both companies and investors,' Jane Wadia, London-based head of sustainability for core products and clients at AXA Investment Managers (AXA IM), told BT.
US tariffs will disrupt the global trade system, she said, 'which has implications for sustainability due to the strain on supply chains'. She added: 'As a result, it may become more challenging for businesses to source materials and finance long-term projects that contribute to their sustainability efforts.'
Even so, sustainability investing experts like Wadia are not too worried about the underperformance of sustainable funds or environmental, social and governance (ESG)-integrated strategies in light of these geopolitical and policy-driven uncertainties.
'We continue to see significant progress in the transition to net zero. A recent report from the International Energy Agency suggests that more than one in four cars sold globally in 2025 will be electric,' she said. 'The cost of renewable energy is falling relative to oil and gas in the long term, while demand for electricity is rising, driven by the ongoing development in China and the growth of artificial intelligence and data centres.'
Despite news headlines about the ESG backlash, the undercurrents of companies' continued commitment to the energy transition and emissions reduction are still 'quite positive', said Louise Dudley, Federated Hermes' portfolio manager for global equities, who also leads ESG and responsible investment research strategy. 'We are still continuing to see opportunities around the world.'
Federated Hermes managed US$839.8 billion in assets as at Mar 31, 2025.
The 'green-hushing' phenomenon – where companies are removing climate goals and Web pages from the public eye but are still committed to sustainable agendas – is still alive and well, she said in an interview with BT.
In addition, some of the underperforming funds could have been those that 'went quite high-risk, quite concentrated', she said, adding: 'Those types of thematic funds will have periods of underperformance as well as periods of outperformance.'
A fund that is less thematic and more diversified is likely to be more resilient in the long term, she added. 'Maybe you don't get the excitement of 'Oh, we're 6 per cent ahead', but when some of these thematic trends, such as inflation, interest rates and all those things (come into play), we'll be well positioned on that,' she noted.
At the core of it, measuring ESG factors is a form of risk management, she added. 'Governance, we always feel, is the backbone (of a firm), where, if a company is doing well from a governance perspective, it's going to do well… because it's going to be thinking about the right kind of risk; and it has the right people in place to manage whatever environment they go into,' she said.
Responsible energy and defence investments
The rise in energy and defence stocks is not necessarily incompatible with sustainable investing either, said Lucian Peppelenbos, climate and biodiversity strategist at Robeco, which had US$222 billion in assets under management and advice, of which US$216 billion is managed in ESG-integrated assets, as at December 2024.
'Within energy stocks, there are companies seriously transitioning; and also in many cases, for example, where gas replaces coal, we can see it as a sustainable transition investment,' said Peppelenbos, who is based in Amsterdam, said in an interview with BT.
For instance, Norwegian oil and gas company Aker BP, which is listed on the Oslo Stock Exchange with a market capitalisation of 176.59 billion kroner (S$22.49 billion) has been viewed as an energy business with strong transition commitments, a relatively clean eco-footprint and strong fundamentals.
Several other, more well-known global names such as Exxon Mobil and Royal Dutch Shell have diversified into alternative energy sources to varying degrees, although some – such as British Petroleum (BP) – have rolled back their commitments to transition away from fossil fuels.
When it comes to defence stocks, Robeco makes sure there is no exposure to controversial weapons – which is against the law, as Peppelenbos reminded – and the firm calls defence investments 'responsible investing' over 'sustainable investing'.
Robeco considers controversial weapons to include cluster munitions, anti-personnel mines, white phosphorus and depleted uranium ammunition, along with chemical, biological and nuclear weapons. Most of these are banned under international treaties.
'(Within) exposure to defence stocks more generally, for example, there are more cybersecurity-related defence stocks that are very well compatible within ESG-integrated strategies,' he said.
For instance, a high-profile incident last year where Northern Korean hackers were accused of allegedly stealing over US$1 billion worth of cryptocurrency highlights how modern warfare has evolved beyond conventional wars to cyberwars.
Peppelenbos also believes that ESG is a performance driver; and because sustainability risks 'can be and often are financially material', integrating those risks makes for better informed investment decisions to help risk-adjusted returns, he said.
'Our research shows, for example, that among companies across high emission sectors and low emission sectors, companies that have good transition plans in terms of climate change – meaning targets that are in line with how their sector should decarbonise over time and are reflected in a credible transition plan – those companies are outperforming the climate laggers in their sector. So that's clearly a piece of evidence where sustainability and performance can actually go hand in hand,' he added.
One underappreciated aspect of clean energy is that it plays a crucial role in future geopolitical stability as conflicts historically often arise over food, resources and energy, Ulrik Fugmann, co-head of environmental strategies group at the BNP Paribas Asset Management, told BT.
Clean energy solutions and environment infrastructure is growing across Asia, Europe and the US at unprecedented speed and scale, he said. This is because of its cost-competitiveness and ability to readily tackle an urgent need to address global power deficits that are accelerated by the progress in artificial intelligence and data centres, said Fugmann, who is based in London.
The asset manager has 602 billion euros (S$892.9 billion) in assets under management, of which 418 billion euros is in ESG assets.
'Given recent years' rise in inflation, interest rates and uncertain policy environment that is now getting re-enforced in the US and Europe, the clean energy sector today trades at valuation levels not seen since the great financial crisis in 2008 and depths of the Covid-19 crisis – in sharp contrast to global markets and elevated valuations in the technology sector trading at all-time highs,' he said.
'The case for sustainable solutions in clean energy has rarely been this attractive – both from a top-down macro-economic perspective and bottom-up valuation point of view,' he added.