Defence & Sustainability
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What you need to know
Defence has long sat outside the remit of sustainable investing, dismissed as incompatible with social good. Yet today’s geopolitical reality is forcing a reassessment. In the wake of Russia’s invasion of Ukraine investors, especially across Europe, are beginning to recognise defence as essential to safeguarding sovereignty, democratic institutions, and the stability upon which sustainable societies depend.
National Security and Sovereignty
President Emmanuel Macron noted in early 2025, “historical events are taking place right now that are shaking up the world order… our prosperity and our security have become as uncertain as ever before.” This growing geopolitical fragmentation, coupled with rising isolationism amongst traditional allies and the continuation of the Russian invasion of Ukraine, has forced European governments and investors alike to reassess long‑standing assumptions about security and defence.
Defence spending is no longer seen as a luxury, but as a necessity with every single European NATO member spending more than 2% of their GDP on Defence1. It is now a critical part of ensuring sovereignty and potentially as a deterrent of growing threats from a world in which is entering a new state of order and influence. The threat of increasing conflict, particularly that of Russia’s threat to peace in Europe, have increased the support for military spending amongst populations – a study by the National Centre for Social Research found that support for increases of military spending is at the highest levels since the survey began in 19832.
The increases in defence budgets have been mirrored in the performance of the defence industry in 2025. European Defence companies have particularly benefited from; 1) Increased European Defence budgets, 2) European governments favouring local Defence companies, exacerbated by wariness of Americas isolationism and changing stance and 3) The EU’s Readiness 2030 plan which seeks to create conditions for €800Bn bn of additional defence expenditures in the coming years.
Shift in Sustainability
The shift in how Defence is viewed in the lens of sustainability can be captured by looking at the growing exposure of the sustainability sector in ESG funds (Article 8 and 9 funds). Research has shown that for article 8 active funds exposure has increased to 2.5% and 1.2% for passive funds as of June 2025, up from 0.6% and 0.2%, at the start of 20223. Whilst ESG funds are increasing their exposure to Defence companies, it is also important to note that the Defence companies which are being included in funds still must meet minimum ESG criteria. The vast majority of article 8 and 9 products exclude companies which are involved in controversial weapons or companies which are violators of the United Nations Global Compact Principles.
Defence companies are becoming increasingly focused on how they manage ESG risks, as a growing number seek to position themselves as “ethical” defence providers. Firms integrating sustainable practices are not only avoiding involvement in controversial weapons production, but are also placing greater emphasis on monitoring how, and by whom, their products are ultimately used. Failure to do so can expose companies to significant reputational damage and potential regulatory or legal consequences.
Regulations are also starting to change in order to make it easier for investors with ESG preferences to invest in the defence sector. SFDR 2.0 is due to be introduced in 2027-2028, with consultation papers suggesting that European defence funds could potentially be marketed as sustainable, allowing for investors with sustainability preferences to invest in Defence funds and increase total investments in European Defence Industries.
Conclusion: Redefining Sustainability in Defence
The evolving geopolitical landscape has shown that defence and sustainability are no longer incompatible concepts but increasingly independent ones. Growing isolationism and possibility of conflict has highlighted the essential role of defence in safeguarding sovereignty, democratic institutions and long-term societal stability. Ultimately, sustainable investing in defence requires a balanced approach: acknowledging the sectors inherent sensitivities while recognising its indispensable role in maintaining the condition under which sustainable societies can flourish and remain free and independent.
[1] How much are Nato members spending on defence?
[2] BSA 42 | Security threats and military spending | National Centre for Social Research
[3] EU ESG Funds’ Exposure to Defense Continues to Increase
[4] Exhibit I: Morningstar Direct
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