German ESG funds are increasing exposure to defence stocks after regulators relaxed restrictions in late 2024, according to data from German funds association, BVI.
Until recently, managers were barred from holding firms deriving more than 10% of revenue from military hardware. However, since December 2024, Germany’s ESG Target Market rules only bars manufacturers of weapons banned under international law.
BVI has observed three main approaches: Church-affiliated managers continue to exclude defence entirely, others permit exposure where arms sales make up only a small slice of revenues, while the third category has scrapped exclusions altogether.
By June 2025, the asset-weighted share of aerospace and defence companies in Article 8 funds had increased from 0.8% at the end of 2024 to 1.3%. German-focused products stand out, with allocations of 4.6% to firms such as Airbus and Rheinmetall. Article 9 funds reported a measurable defence weighting of 0.2%.
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That said, sustainable funds remain more cautious than their conventional peers, which have 3.6% in aerospace and defence. Elsewhere in Europe, Article 8 and Article 9 funds already average closer to 2% ( Morningstar for Q1 2025). BVI analysts expect Germany’s allocations to rise steadily through the year.
The EU’s Sustainable Finance Disclosure Regulation classifies investment funds into three categories: Article 6 (non-ESG), Article 8 (“light green” or promoting ESG characteristics) and Article 9 (“dark green” or targeting measurable sustainability objectives). The regulation aims to redirect capital towards sustainable investments, manage ESG risks and make financial markets more transparent.
By mid-2025, German Article 8 and 9 funds oversaw more than €1.2 trillion, though the growth was driven largely by reclassified institutional Spezialfonds (German fund structures for institutional investors). Retail ESG funds ( Article 8 and Article 9 funds) shrank to just under €750 billion.
Among private investors, in the first half of 2025, conventional retail funds took in nearly €50 billion of net inflows, while sustainable funds suffered €1.3 billion in outflows. Among institutions, Spezialfonds investors placed more than three times as much into Article 6 products as into Article 8 and 9.
