Responsible investors in Europe are warming up to defence stocks

Half a century ago, as the Vietnam War raged in Southeast Asia, the first publicly available mutual fund with a responsible investment focus hit the market. Pax World Fund aimed to generate stock market returns while keeping weapons manufacturers out of the portfolio. The fund helped to establish an entire values-based investing industry, with many similar funds avoiding military-related companies.

Now, with Russia waging war against Ukraine and Europe rearming its militaries, the responsible investment industry is rethinking its historic exclusion of weapons companies. There is a growing consensus among asset managers in Western nations that military investments are not only acceptable but are urgently needed for the defence of Europe.

Yet some responsible investment managers are pushing back, saying that the fundamental objection to military companies has not changed and that sustainability-focused investors have better choices for their dollars and euros. Here are some questions and answers about this remarkable turnaround on a fundamental principle of responsible investment.

It is not the mission of sustainable or ethical investors to come to the rescue of the defence industry.

– Ketan Patel, CEO, Greater Pacific Capital,

Why did early socially responsible funds object to military investments?

Pax World Fund was launched in 1971 by Luther Tyson and Jack Corbett, two United Methodist ministers and anti–Vietnam War activists. Tyson and Corbett established the fund as a vehicle for churches to avoid investing in companies manufacturing Agent Orange, napalm and other weapons for the Vietnam War. The fund became an early pioneer in the socially responsible investment (SRI) movement.

For activists who inspired these nascent SRI funds, the logic was clear: marching in protests against nuclear armaments while investing their assets in companies profiting from the Vietnam War and Cold War was simply incompatible. As “Ban the Bomb” rallies drew millions of protesters in the United States and Europe, a strict military exclusion became commonplace in the new SRI funds launched in the 1980s.

What happened to the blanket defence exclusion?

Peace protests waned with the fall of the Berlin Wall in 1989. In the 1990s, the absolute exclusion of defence companies in SRI funds gave way to a more nuanced approach.

Leading aerospace and technology companies were (and still are) active in both civilian and military production. Sustainable investment funds, as SRI came to be known in the 2000s, adopted a new policy to limit the exclusion to companies specifically manufacturing controversial weapons, including anti-personnel mines, cluster munitions and biological, chemical and nuclear weapons.

Some sustainable funds set defence thresholds, permitting investments in companies with military revenues below a certain level, such as two, five or 10% of total sales.

Where does the military exclusion stand today?

This spring, three leading European sustainable investment managers – UBS, Allianz and DWS Group – dropped their 10% thresholds for military production. Allianz and UBS also announced they would no longer exclude companies with nuclear production in their sustainable funds. Legal & General, the largest asset manager in the United Kingdom, also announced it will increase its defence industry holdings.

In addition to these recent public announcements, the industry has been quietly moving to relax its defence exclusions. Thirty-five percent of European sustainable investment funds held some exposure to defence stocks in the first quarter of 2025, an increase from 24% in the first quarter of 2021, according to Morningstar Direct.

The issue of military screens in U.S. sustainable funds has not attracted as much attention as in Europe, partly because it has been overshadowed by the heated debate on fossil fuel exclusions. However, 63% of entities issuing sustainable investments in 2024 excluded military investments from their portfolios, according to data collected by the U.S. Sustainable Investment Forum. It’s not known if this is up or down from the previous survey in 2022.

How can companies that make products for death and destruction be ‘sustainable’?

Europeans fear that Russian aggression won’t stop at Ukraine. But European defence production has lagged in recent years, and Europe has come to depend on non-European contractors, primarily from the United States, for much of its military equipment.

In response, the European Union has established the ReArm Europe initiative, a loan program to unlock private investment for Europe’s defence sector. The target is to increase European military spending by €800 billion over five years. For some proponents of environmental, social and governance (ESG) investing, the European defence buildup should be a welcome and positive choice in sustainability portfolios.

“Europe’s armaments companies deserve to be reclassified from untouchables to legitimate components of the ‘S’ in ESG,” writes Stephen Davis, a corporate governance researcher at Harvard Law School and one of the founders of the United Nations Principles for Responsible Investment. “The products they produce are deployed at least in part to ensure the most basic social good: keeping people in Europe safe and free.”

Do sustainable investment managers have misgivings about investing in tanks, F-35s and nuclear bombs?

Some ESG managers and advisers are pushing back against the headlong rush to reconcile with weapons makers.

European asset manager Candriam reaffirmed its exclusion on manufacturers of controversial weapons and is staying the course on military thresholds (10% or 3%, depending on the stringency of different funds). Candriam said it is holding the line given the complex and opaque nature of the defence industry, creating potential supply chain, corruption and human rights risks.

“The idea that weapons can only be produced and deployed in a specific conflict is naïve at best, in a world where the international arms trade services the highest bidder with little or no regard to the morals and ethics of the buyer or where the weapons will be deployed,” writes Ketan Patel, CEO of Greater Pacific Capital, an ESG impact investor in Asia and India, in an industry commentary.

On this point, KLP, Norway’s largest private pension fund, recently dropped two companies from its portfolio – U.S.-based Oshkosh and Germany-based ThyssenKrupp – because they have sold or continue to sell equipment used by the Israeli army in Gaza. KLP cited its military investment guidelines, which exclude companies selling weapons used in “serious and systematic breaches of international law.”

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Where does this leave investors who have a social or environmental focus?

For sustainability-oriented investors, it’s important to keep in the mind the European regulatory distinction between funds with sustainability characteristics (Article 8) and funds with sustainability objectives (Article 9). Investors looking for incorporation of ESG factors in a diversified portfolio and who are comfortable with some defence exposure can look to Article 8 funds. Investors looking for sustainability action on issues like climate change and a more restrictive view on defence are more likely to find these strategies in Article 9 funds.

As with all financial decisions, it’s important for investors to research individual funds to ensure consistency with their goals.

In the United States, investor advocacy group As You Sow maintains a database ranking funds for 401(k) or personal investment accounts based on defence exposure. The group also works with Corporate Knights on an annual ranking of the world’s top Clean 200 companies, which can be used as a resource for sustainability-focused stock portfolios. The list excludes major military arms manufacturers, as well as cluster munitions, nuclear weapons and civilian firearm manufacturers.

“Investors who want to support the defence industry are free to direct their capital, but it should not be the case that sustainable investors are accused of not being patriotic by failing to follow suit,” Patel writes. “It is not the mission of sustainable or ethical investors to come to the rescue of the defence industry.”

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).