ESG and Defence: Reconciling Ethics and Security

The rise in military spending and geopolitical threats is forcing a re-examination of environmental, social, and governance (ESG) principles as they relate to defence investments. For years, many institutional investors excluded defence stocks on ethical grounds, akin to “sin” industries like tobacco. But Russia’s war in Ukraine and NATO’s renewed focus on deterrence have upended the debate. An increasing number of asset owners and advisers now argue that supporting democratic nations’ defence can align with social responsibility – posing the question: can investing in defence be reconciled with ESG values? This complex debate is playing out in boardrooms and policy circles across Europe. The shift is evident in portfolio decisions: Europe’s largest money managers raised their average exposure to aerospace and defence stocks to 1.1% in 2024, up from 0.7% two years prior. As one pension executive put it, “We’ve come to a point where if you rule out defence, you’re the one who has to explain, not the other way around”.