Key takeaways "Investments in the Defence Sector and Sustainable Investing"

On 4 June, Towards Sustainability hosted its third thematic day in Brussels on Defence and Sustainable Investing. These events are part of the label’s stakeholder consultations and aim to open a dialogue on specific sustainability issues with representatives from civil society, asset managers, think tanks, academics, and policy makers. The panel included Marnix Arickx - CEO Belgium, BNP Paribas Asset Management, Diederik Cops - Senior Researcher, Vlaams Vredesinstituut (Flemish Peace Institute), Pablo Fernandez-Cras - Policy Officer Defence Industrial Investments, DG DEFIS (European Commission), Jan Pie - Secretary General, Aerospace, Security and Defence Industries Association of Europe (ASD), Wim Van Hyfte, Ph.D. - Global Head of ESG Investments & Research, CANDRIAM, and Jürgen Verschaeve - CIO, KBC Asset Management. The discussion was moderated by Christel Dumas, Sustainable Finance Professor at ICHEC Brussels Management School and Member of the Board, Towards Sustainability. Note that the views expressed during the debate do not necessarily reflect the opinion of Towards Sustainability nor a commitment to actions and decisions in any direction. You can read Towards Sustainability's position on this topic that was published on 23 June.

Not so long ago, the idea that defence could form part of a sustainable investment strategy would have been laughed out of the room. ESG funds steered well clear of military technology, controversial weapons and anything remotely linked to warfare. But Russia’s invasion of Ukraine has shifted the goalposts. Defence is back at the top of Europe’s agenda, and the uncomfortable question is now firmly on the table: should the defence sector have a place in sustainable investment portfolios—and can it? 

Walking the Line: Defence and the Ethics of ESG

For many ESG fund managers, defence remains a red line.
“I don’t see any place for defence in sustainable portfolios,” says Wim Van Hyfte, Global Head of ESG Investments at CANDRIAM. “The sector lacks transparency, the governance and reputational risks are far too high. In addition, if you adhere to the principle of ‘do no significant harm’ embedded in several pieces of EU Sustainable Finance legislation, such as the EU Taxonomy and SFDR regulation, this simply doesn’t wash.”

Diederik Cops of the Flemish Peace Institute warns against throwing the baby out with the bathwater. “Sustainability isn’t a label—it’s a verb. Just because a government says defence is sustainable doesn’t make it so.” He argues for a full value chain analysis: “Where are the weapons produced? Who are they for? And how are they being used?”

There’s caution too at KBC Asset Management, though the picture is far from black and white.
“Our surveys show that 40% of retail investors are open to defence, 10% are firmly against it, and the rest are undecided,” says Jürgen Verschaeve. “That says a lot about how sensitive this issue is.”

There’s a growing call for nuance.
“We don’t believe in blanket exclusions,” says Marnix Arickx of BNP Paribas Asset Management. “Defence can be a necessary condition for peace and stability. But we need a clear set of standards. Controversial weapons are off the table, but excluding the entire sector is a step too far.”

Facing Facts: Markets, Risk and Capital

Even those who accept the strategic necessity of defence run into a thorny practical problem: how do you fund it under current ESG rules?
Pablo Fernandez-Cras of the European Commission’s Directorate-General for Defence Industry and Space lays it out plainly: “We’re playing catch-up after three decades of underinvestment in our own defence. Had we consistently spent 2% of GDP on defence expenditure since 2003, the EU 27 would have invested an addition €400 billion in investments in defence equipment (in constant prices). And these calculations were made before the US showed an increasing willingness to disengage from Europe’s security.” His message is clear: the Commission is pushing for a once in a generation spending surge in defence to secure Europe’s peace—actively—and while Governments are raising their commitments, to meet the challenge we need to bring private capital on board.

But the money isn’t exactly flowing.
“Many companies don’t even apply for funding, assuming they’ll be turned down,” says Arickx. “That’s not the point. We wouldn’t include them because they need the money, but because they’re needed for a sustainable society.”

Van Hyfte pushes back: “I find it hard to believe ESG funds are the main reason behind any funding gap. Defence doesn’t need the sustainable investment market to develop - there’s already ample capital available elsewhere.”

Jan Pie, Secretary General of ASD (AeroSpace and Defence Industries Association of Europe), sees the issue in broader terms:
“One SME was denied a loan simply for supplying components to defence. A dual-use firm didn’t scale up for fear of damaging its reputation among clients.” According to him, the ecosystem is far larger than most people think—with thousands of suppliers effectively left out in the cold.

“Sustainable funds aren’t the only problem,” he concedes. “But they do send a powerful signal that the defence sector is somehow illegitimate.”
Verschaeve sees a vicious cycle: “The sector isn’t popular and has underperformed. But that’s largely the result of years of neglect. You can’t compare it to the US, where defence is much more tightly woven into the fabric of the economy.”

The Role of Policy: Correction or Signal?

The European Commission acknowledges the stalemate—and is trying to address it. 
“We can no longer take peace for granted,” says Fernandez-Cras. “We have to build it, and in the face of Russian aggression, that means building our deterrence capacity.” Brussels is now working on clearer guidance on how to articulate defence sector investments with the EU’s Sustainable Finance Framework, including through a Defence Readiness Omnibus package [presented on 17 June, after this panel discussion].  
DG DEFIS also supports defence startups and offers to accompany the private sector in de-risking defence sector investments through the EU Defence Innovation Scheme and the Defence Equity Facility, a funds-of-funds construction where investments are subject to due diligence through the European Investment Fund.

Still, ESG frameworks remain rigid.
“In other parts of the world, defence is naturally seen as part of ESG,” says Pie. “Only in Europe do banks and investors shut the sector out entirely. The signal ESG sends here has become too strong—too unforgiving.”

He’s calling for a rethink.
“The defence sector wants to be transparent. We welcome ESG standards. But there are limits—some information simply can’t be made public for national security reasons. This is not just any industry. It’s exceptional, and it should be treated as such.”

Verschaeve also points to the role of public sentiment.
“Retail investors want clear-cut answers: fossil fuels—yes or no? Weapons—yes or no? That wipes out nuance, but it does make things simpler. Exclusions are the shortcut to transparency.”

Time for Grown-Up Choices and Tailored Standards

The debate around defence and sustainability cannot be captured in black and white. The war in Ukraine has painfully exposed how closely security and sustainability are intertwined. The question is whether they can be captured in clear-cut standards. But that should not stand in the way of making thoughtful choices.

As Arickx puts it:
“A gram of CO₂ is easy to measure. The rest of ESG is up for interpretation. And that’s fine—so long as we’re willing to make the call and there is a clear regulation framework.”