Is investment in the arms industry ever legitimate?

Last month, together with a number of other companies Aegon received negative press about their investment in the arms industry. In a candid interview, Marc van Weede, Head of Strategy and Sustainability at Aegon, tackled this subject head on during an interview on Dutch radio.

Question: In a year, Aegon's 645 billion euro in investments is almost as much as the combined earnings of the entire Dutch population.

Marc: Yes, such an enormous amount is difficult to imagine. It's made up of the reserves we've built up in order to pay out future life insurance claims and pensions.

Question: In your role as Head of Sustainability, can you make the world a better place to live?

Marc: That's no easy task. We represent many different interests that have to be taken into consideration. Our primary goal is to safeguard our investments – to make sure they are invested in a way that ensures that in 20 or 30 years from now we have the means to pay out our customer's pensions and that we've produced a reasonable return on the investment.

Question: I can imagine that around the table at Aegon you've got colleagues who say, "I've got a great sustainable project. Can't we invest in that?"

Marc: In the early days, at Aegon and other companies, sustainability was a small department in a separate office, with people who did 'their thing'. These days sustainability is something companies, including us, try to integrate in all company decisions.

Question: In June, a report was published by the Fair Finance Guide (Eerlijke Geldwijzer), that highlighted that Aegon and other insurance companies invest billions in the arms industry, which benefit, among others, Saudi Arabia and Nigeria. The majority of insurance company customers have said they don't find this acceptable? Is investment in arms sustainable?

Marc: In the common sense of the word, war isn't sustainable. But in terms of defense, we believe that as a country we have a right to defend itself. For example, The Netherlands takes part in peace keeping missions. Because of this we believe that it's legitimate to invest in the arms industry. And often we're talking about companies that people are very familiar with, such as Boeing and Airbus, which have a large civil aviation business. We believe that its legitimate to invest in these types of companies.

Question: But this assumes that the weapons always fall in the hands of the good guys?

Marc: Who decides where these weapons end up? This isn't the companies with whom we've invested, but the governments of the countries where these companies are located.

Question: But you could make things easier for yourself by simply avoiding these companies?

Marc: If you're a large international company like Aegon, where more than 80% of your customers, and therefore your investments come from outside of the Netherlands, then it's not so easy to exclude significant sectors. As an investor you need to have a wide spread of sectors in your portfolio. If you exclude too many sectors, then at a certain moment the choice becomes too limited.

Question: Some might say that if customers concerned about sustainability have other options for sustainable living, but when it comes to investment they simply want the biggest return on their investment?

Marc: As an investor we have a dual responsibility. Firstly to ensure that customers get a good return on their investment, and to safeguard their money to ensure it is still there in 20 or 30 years when they need it. But at that point in their lives we also want them to be living in a healthy world. And therefore we also have a environmental and social responsibility.

Question: Is investment in the arms industry something that you would prefer to get rid of?

Marc: Ultimately we hope that one day it won't be necessary to produce weapons in the world. But right now, that's not the world we live in. As long as we live in a world where armies are needed, we think it's legitimate to invest in the arms industry.

Question: What do you think of companies like Achmea that don't invest in weapons?

Marc: Achmea has a very different financial model than us. It's a company with a Dutch customer base and Dutch investments. We are a company with strong roots in society, in the Netherlands and the United States and 20 other countries. We listen to the needs of the people in these markets.

Question: I can't believe that the majority of the Dutch are happy with the fact that you invest in companies that make nuclear arms?

Marc: An elected international organization has determined that there are five countries in the world who are authorized to have nuclear arms. It's essential that these weapons are well maintained. So we've decided not to exclude companies that carry out this maintenance, as long as they don't supply countries that don't fall under this international approval. But you're right. The difficulty is that there are a lot of Dutch people who don't agree with this. Therefore we have to continue to be transparent and talk about this.

Question: You perform very well on the Fair Finance Guide in terms of Human Rights. Are you happy with that?

Marc: In some areas of the Fair Finance Guide we score well and in others not so well. Just like everyone else, it's great when we score well, and concerning when we don't, but the Fair Finance Guide is not a benchmark that we use to determine our approach to sustainable investment. Of course, we do take a look, and the Fair Finance Guide plays an important role in keeping the sector on its toes in this area, and in terms of asking critical questions.

Question: You didn't score so well in terms of climate neutral investment? Did you find that harsh?

Marc: Climate change is an extremely important subject for us. And I come back to my earlier point that it's important for us that in 20 or 30 years' time the earth remains a healthy place to live. As part of a society we must work together to ensure we tackle this. This means that we, as an investor, must take a look at the role we can play in facilitating the transition towards a CO2 neutral world.

We have already started to work on this. We already invest in sustainable forestry, wind parks, in green bonds and more. But this currently represents just a small percentage of our total investment. But what I'm most proud of is that over the last few years we've moved from a very fragmented approach to sustainable investment, to having one common global approach within Aegon – from the US to the Netherlands. This required a lot of effort and buy-in from a lot of people to achieve this.

Question: Another difficult issue for Aegon is the historical mis-selling of unit-linked policies. According to Aegon's website, trustworthiness is key to their business. How important is it for Aegon that the unit-linked policy affair continues to drag on?

Marc: This was a terrible situation. It's an area of our business where we made some serious mistakes.

Question: But you were with Aegon at the time. Did you never once question what was going on?

Marc: The big problem with unit-linked policies was that it only came to light when the stock markets collapsed. While they continued to grow, we didn't have any complaints. If you look back, we made a mistake, there was a lack of transparency internally and also with our customers. The cost element of the products was far too high. But we've now been busy for 12 years to fix the damage caused by this. We've already paid out around 900 million to put this right.

Question: Why doesn't Aegon just make a final effort to close this chapter in their history?

Marc: We're busy finding solutions for this on a case-by-case basis, with the many different types of customers, with different scenarios and different products. As with any scenario like this, there will always be customers who aren't happy with the proposed solution. So we'll continue to work with these people on an individual basis to reach an agreement everyone is happy with.

Question: It doesn't help your image, when people continue to bring this up? Wouldn't it have been better for Aegon to have done a clean sweep to close this chapter once and for all?

Marc: Because of the complexity of each individual case, this would have been impossible.

Question: Coming back to transparency - which is clearly important for Aegon. I read somewhere that this is handled very differently in the Netherlands compared to the United States where everyone is expected to be a winner?

Marc: Indeed. We give a lot attention to how we report our performance. We produce an integrated report which explains about the environment in which we operate, the strategic decisions we made, and the results we've achieved. In the report we try to find a balance between the good news, and things that could have gone better. In the US the emphasis is more on the good news, but we don't produce a separate report there.

Question: Do you invest in Iran. There are good opportunities there?

Marc: No. I don't believe that as a company we're considering direct investments in Iran. But I think that a a number of companies in our investment portfolio will invest in Iran. Perhaps in the field of consumer goods. I don't have the information to hand about specific companies, but I can imagine that the likes of Shell would be among them.

Question: Where do you want to stand in the Fair Finance Guide in five years' time.

Marc: A score from the Fair Finance Guide isn't a specific goal for us. What I do hope is that we can help customers who have investments and pensions with us, to become more aware of the importance of sustainable investments, and have a better understanding of sustainable investment – this is often quite nuanced. And also that we have succeeded in making our approach, and the rationale behind our choices, clear.