When the UN launched its Principles for Responsible Investment (“UN PRI”) in 2006, exclusion policies became a natural cornerstone of responsible investment, particularly among institutional investors. These policies gained widespread adoption across the EU following the implementation of the Sustainable Finance Disclosure Regulation (“SFDR”).
But in recent years something fundamental has changed.
Rising geopolitical tensions and conflicts across multiple regions have reshaped the defence investment outlook. Globalisation has amplified this shift, as today's interconnected society more frequently voices its stance on global conflicts, such as the tragic famine in Gaza, which has pressured governments to reconsider their positions.
Three pressing questions now frame the debate in responsible investment:
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How has institutional investor sentiment on defence shifted?
The UN PRI acknowledges that escalating global conflict has driven increased defence spending. A March 2024 European Commission report highlighted a stark challenge: defence companies face significant barriers in accessing private financing as the investment industry focuses on sustainability considerations.
This tension between sustainability mandates and security imperatives sits at the heart of today’s investment paradox. -
How are private equity and venture capital responding to defence sector opportunities?
Bain's analysis reveals a widening gap between U.S. defence requirements and available public budgets, driving increased reliance on private capital. European military budgets are growing simultaneously, supported by initiatives such as the ReArm Europe plan. What was once an "automatic exclusion" is now subject to strategic reassessment as nations seek to reduce dependence on U.S. capabilities.
The investment surge is quantified by S&P Global data showing private equity and venture capital investments in aerospace and defence reached $4.27 billion globally between January and mid-March, nearly matching the $4.31 billion invested throughout 2024.
We're witnessing this transformation first-hand. Defence investment is no longer theoretical - defence-themed funds are proliferating, many classified as sustainability-compliant under SFDR Article 8. -
What constitutes acceptable defence investment today?
Defence investment is now viewed through a technological lens. Bain identifies two primary value-creation opportunities for private capital:
- Disruptive start-ups that reduce battlefield costs and improve operational efficiency
- Established companies scaling manufacturing and production capacity
A substantial investment opportunity exists within non-lethal support industries including cyber security, intelligence, logistics, and infrastructure. Many investors consider these sectors "acceptable." Yet, as Robeco observes, "natural reluctance to invest in defence" persists because of its inherent association with conflict.
Controversial weapons banned under international treaties remain completely excluded from responsible investment frameworks.
Investment implications
The sector has moved from categorical exclusion to nuanced evaluation. Strategic imperatives, technological innovation, and shifting societal expectations are driving a thorough reassessment of defence-related investments.
Institutional investors, private equity, and venture capital firms now acknowledge the complexity of defence investments, balancing ethical considerations with national security requirements and economic opportunities.
As the responsible investment community adapts to this transition, transparency and clear frameworks become necessary. Investors must maintain responsible investment principles while operating in a world where defence, technology, and sustainability more frequently intersect.
The real test is whether investors can set credible limits that balance sustainability values with security realities.
