BAE faces further ESG outflows, Exane says

BAE Systems faces further outflows if the trend towards responsible investing continues, Exane BNP Paribas said as the broker cut its rating on BAE to 'neutral' and reduced its share price target by 15% to 525p.

European funds are moving rapidly to satisfy ESG (environmental, social and governance) requirements imposed by investors and the defence sector has been penalised because of a lack of agreement on compliance, Exane said. Many asset managers are dumping companies rather than risk having to justify a potentially controversial investment, it added.

Aerospace and defence companies could face a further derating if their shares were to be treated like tobacco companies. The sector looks cheap but a rebound may not happen unless companies take back control of their stories, Exane said.

BAE needs to take action on important controversies for its value to materialise and could be snubbed by more investors if ESG gains further momentum, Exane said. Among other contentious actions, BAE has sold billions of dollars of arms to Saudi Arabia that campaigners say have been used against civilians in Yemen.

"Corporates and investors need to take control of the defence exclusion debate," Exane analyst Chloe Lemarie said in a note to clients. She said investors should "transform their exclusion strategy into a lobbying tool that can have an actual ESG impact".

Capital markets days at Thales and probably BAE are potential catalysts to take the debate further Lemarie said. BAE shares fell 2% to 516p at 15:30 GMT.