Changing geopolitical risks, challenging market conditions, and expansive public funding have increased investor attention on the defence sector. Traditionally, Environmental, Social, and Governance (ESG) frameworks led many investors to exclude defence related industries from their portfolios. However, escalating global instability - most notably the war in Ukraine and the subsequent increasing NATO expenditure limits - has ignited debate around the role of defence investments within responsible investment paradigms.

The Traditional Stance on Defence Investments

Historically, ESG-focused funds have categorized defence as incompatible with 'ethical' investment principles. This stance was rooted in the belief that investments should not support industries associated with violence and warfare. Consequently, many institutional and private investors implemented exclusion policies, prohibiting investments in companies that derived significant revenue from military activities or defence contracts (VanEck).

Catalysts for Change

The resurgence of military threats to Europe has highlighted the need for robust and modernized defence capabilities. This has led policymakers and financial institutions to reconsider the blanket exclusion of defence from ESG-compliant portfolios. A growing number argue that supporting national and regional security aligns with the 'Social' component of ESG, which emphasizes public safety and societal well-being (Allianz Global Investors).

Evolving Investment Policies

Based In response to these developments, several major European asset managers have revised their investment criteria. I’ve observed a clear shift in sentiment within private markets through recent conversations with private equity and venture capital funds. According to Morningstar Direct, at least 30 European funds that previously had no exposure to aerospace and defence companies added positions by early 2025 (Responsible Investor). This transition is partly driven by strong performance in the sector amid broader market uncertainty.

Balancing Ethical Considerations with Security Needs

Despite these changes, integrating defence into ESG strategies remains contentious. Critics argue that investing in defence contradicts the foundational ethics of responsible investment. Additionally, there are material ESG risks to consider—ranging from human rights concerns and political instability to environmental damage and high carbon emissions. Consequently, many large asset managers are maintaining exclusionary stances, citing concerns over potential conflicts with EU sustainable finance regulations and reputational risks (VanEck).

Nonetheless, proponents assert that defence can be seen as a force for stability. For instance, the German government has stated that sustainable finance regulations must not hinder funding for the defence sector (Allianz Global Investors). In the UK, over 100 Labour MPs and peers signed an open letter claiming that ESG policies are impeding necessary defence spending (The Guardian).

This evolving discourse suggests that responsible investment must now grapple with the complex trade-offs between politics, security, and sustainability.

The Opportunity

The result is a growing opportunity is emerging for both private investors and defence firms seeking capital. Specialist funds dedicated to defence technology are gaining traction, alongside generalist investors now making room in their portfolios for security-oriented startups.

European defence and security tech startups saw a 24% surge in venture capital investment in 2024, reaching a record $5.2 billion despite the broader VC market downturn (Financial Times). This signals a strategic realignment - where capital is not only chasing innovation, but also recognising security as a cornerstone of long-term value and resilience.

Our Role in Supporting This Shift

In this rapidly evolving landscape, leadership is key. Whether supporting established industry leaders, investors, or emerging innovators, our defence practice provides tailored leadership solutions that help organizations stay ahead of the curve, foster innovation, break into new markets or grow their presence, and seize new opportunities.

Connect with our Defence, Digital Security, and Dual-Use Technology practice to explore how our expertise can help you navigate the evolving landscape of defence.