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We all aspire to live in safety and security, and our values strongly oppose violence, war, and human-made disasters. Since the launch of the UN Principles for Responsible Investment (UN PRI) in 2006, exclusion policies have become a cornerstone of responsible investment, particularly among institutional investors. These policies were later widely adopted across the EU with the implementation of the Sustainable Finance Disclosure Regulation (SFDR).
However, the landscape has evolved significantly—especially in recent years, shaped by rising geopolitical tensions and conflicts across various regions. Globalization has also driven this shift, as today’s interconnected society increasingly voices its stance on global conflicts—such as the tragic famine unfolding in Gaza which has, in turn, pressured governments to reconsider their positions.
This global shift prompts three key questions:
- How has the position of institutional investors on the defense sector evolved?
The UN PRI acknowledges that increasing global conflict has led to a rise in defense spending. Notably, a European Commission report from March 2024 highlighted the defense sector’s difficulty in accessing private financing, as the investment industry becomes increasingly conscious of ESG considerations.
- How is the Private Equity and Venture Capital industry responding to the need to support the defense value chain?
According to Bain, the widening gap between U.S. defense requirements and available budgets is driving greater reliance on private capital. In Europe, military budgets are expanding, supported by initiatives like the ReArm Europe plan. What was once considered an “automatic exclusion” is now being reassessed to meet strategic needs and reduce dependence on U.S. capabilities.
The rise in investment is well depicted by S&P Global, reporting that private equity and venture capital investments in aerospace and defense reached $4.27 billion globally between January 1 and March 16—nearly matching the $4.31 billion invested throughout all of 2024.
At Holtara, we observe that defense investment is becoming a tangible reality. There is a noticeable rise in defense-themed funds, many of which are classified as ESG-compliant under Article 8 of the SFDR.
- How is this shift reflected in responsible investment strategies—what is acceptable, and what remains off-limits?
As defense gains momentum, responsible investment strategies are adapting, particularly in terms of exclusion lists. Defense is increasingly viewed through a technological lens. Bain notes that private capital can add value in two key areas:
- Disruptive start-ups that reduce battlefield costs and enhance efficiency
- Established companies that scale manufacturing and production capacity
There is a broad and growing space for investment in non-lethal support industries—cybersecurity, intelligence, logistics, and infrastructure—that are considered “acceptable” by many investors. Yet, as Robeco aptly puts it, there remains a “natural reluctance to invest in defense, due to its inherent association with unsustainable and undesirable conflicts.”
Importantly, controversial weapons—those banned under international treaties—remain a clear red line and are not considered acceptable under any responsible investment framework.
In conclusion, what was once a clear-cut exclusion is now subject to nuanced reassessment, driven by strategic imperatives, technological innovation, and shifting societal expectations. Institutional investors, private equity, and venture capital are increasingly recognizing the complexity of defense-related investments—balancing ethical considerations with national security needs and economic opportunity. As the responsible investment community navigates this transition, clarity, transparency, and dialogue will be essential. Investors must continue to uphold core ESG principles while adapting to a world where defense, technology, and sustainability intersect. The challenge ahead lies in defining what is truly “acceptable” and ensuring that investment decisions remain aligned with both values and realities.
Comments by Maria Merry del Val, Director – ESG & Responsible Investing, Apex Group
