(Bloomberg) — Deutsche Bank AG’s investment unit is removing restrictions that had prevented a number of its funds from holding defense assets, according to its chief executive officer.
The move, made possible by a recent adjustment in Germany’s investment guidelines, has the potential to free up “hundreds of billions” of euros across the country’s asset management industry for defense allocations, DWS Group CEO Stefan Hoops said in an interview on Wednesday.
It’s part of a wider reset across Europe’s investment industry, as fund managers from Scandinavia to France look for ways to support an industry whose geopolitical significance has soared in the face of war and souring ties with the US. The pivot has also helped boost investment returns, with defense assets such as Germany’s Rheinmetall AG having more than doubled in value this year alone.
Industry rules for funds marketing themselves as ESG (environmental, social and governance) used to largely exclude arms manufacturers, but “that has now changed,” Hoops said. That’s also due to the defense sector’s financial performance, he said.
Several industry standard setters for the German asset management industry late last year agreed to change a rule known as ESG Target Market Concept, DWS said in a separate statement to Bloomberg News on Wednesday. Developed in 2021, “when there were no standards for sustainable products in the EU,” the rule excluded many defense investment from ESG funds.
The decision to change the guidelines applies across Germany, enabling the country’s asset managers to open ESG funds to defense investments.
DWS is now in the process of adjusting the documentation of funds applying its DWS Basic Exclusions filter, according to the statement. The change, which will go into effect on May 21, will scrap a threshold that had prevented funds from holding companies that got more than 10% of their revenue from defense activities. It will also free funds to add shares of companies linked to nuclear weapons, DWS said.
The adjustments mean that 34 members of the MSCI World Index — accounting for 2.26% of its weight — will be added to the universe of investable firms for DWS funds previously subject to defense restrictions, according to the statement. The asset manager’s Controversial Weapons policy, which excludes cluster munition and other arms, continues to apply, it said.
“The Target Market Concept has to change for the industry, then the prospectuses have to change, and then we can make the changes,” Hoops said in the interview, explaining how the changes take effect.
DWS isn’t planning to put all the money that’s unlocked by these adjustments into defense, Hoops said. “But if the question is, what quantum of funds can then all of the sudden start investing, those are hundreds of billions of notional that can then start investing in defense.”
“There will definitely be a catch-up,” Hoops said. “There’s no question about that.”
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