The narrative around defence investing has undergone a fundamental shift

Over the past year, multiple officials and institutions have explicitly labeled defence as an “ethical” or necessary investment in peace and stability. The UK government, for example, told investors that funding defence companies is “an ethical investment… stepping up to take more responsibility for our continent’s defence”. This messaging is filtering through to asset managers and pension funds. In practice, investors who previously avoided defence on ESG (Environmental, Social, Governance) grounds are reconsidering. Switzerland’s UBS Asset Management confirmed it is “reviewing defence sector exclusions” across its funds, and consultants like Mercer report that clients (including pension funds) are now asking managers to include defence stocks even in sustainability-oriented portfoliosr. A Finnish pension CEO noted the paradigm flip: instead of defending why they hold defence stocks, managers now might have to defend excluding them, given Europe’s security situation. This ESG repositioning has also been institutionalized in subtle ways. Regulators in the UK clarified that no law bars pension trustees from investing in defence for ethical reasons. In the EU, officials hinted that the sustainable finance taxonomy could be adjusted to not automatically class standard defence activities as “unsustainable” – indeed, Euronext’s CEO said ESG indices should restrict exclusions to truly controversial weapons (like banned munitions)r. As a result, mainstream European investors are warming to defence. For decades, many treated defence like tobacco or gambling – avoiding it to meet ethical mandates. Now, the war in Ukraine and geopolitical threats have created a counter-argument that defence is a public good (defending democracy, preventing aggression) and thus compatible with socially conscious investing. This sea change in perception is crucial for the sector: it widens the pool of capital available. Large pension and sovereign funds that had zero allocation to defence might initiate positions, providing sustained support to defence equities and debt. One tangible sign: Norway’s huge sovereign wealth fund (historically very strict on ethical exclusions) is re-evaluating its stance, with the central bank governor acknowledging that ethical investing standards may need to change regarding defence. While not everyone is convinced (some ESG-focused funds still exclude arms entirely), the momentum is clearly toward greater acceptance. In summary, defence has been partially rehabilitated in the eyes of private finance – a dramatic and rapid reputational turnaround triggered by the clear need for deterrence in Europe.