ESG analysis, responsible investment and sustainable investment are frequently treated as interchangeable concepts. They are not, and understanding the difference is essential to assessing the defence sector appropriately.
ESG neither excludes defence across the board nor endorses it without qualification. It provides a risk framework built around two non-negotiable lines: controversial weapons are excluded outright, while companies outside that perimeter are assessed individually against a defined methodology. Passing that assessment may make a company investable, but it does not qualify defence as sustainable.
Defence was never entirely off-limits
There is a persistent misconception that ESG investing has always excluded defence. In reality, ESG frameworks have consistently ruled out a narrower category: controversial weapons, including anti-personnel mines, cluster munitions, chemical, biological and nuclear weapons. This position is grounded in internationally recognised humanitarian conventions, notably the 1997 Ottawa Convention on anti-personnel mines and the 2008 Oslo Convention on cluster munitions.
Outside this perimeter, the sector is far from uniform. Many defence companies also develop civil technologies in aerospace, cybersecurity, communications or industrial engineering. Others operate diversified businesses in which military activities represent only one source of revenue. Treating the entire sector as a single category therefore overlooks meaningful differences in business models, governance, product mix and risk profiles.
At its core, ESG is a framework for identifying and pricing non-financial risk, not a moral scorecard dividing industries into “good” and “bad”. The relevant question is not whether defence is acceptable as a category, but whether an individual company meets the requirements of a clearly defined methodology.
This means examining what the company produces, the proportion of its military and civilian revenues, the quality of its governance and disclosure, its exposure to human rights or international-norm controversies, and any involvement in controversial weapons.
Investors may reach different conclusions depending on their philosophy and exclusion thresholds. This is not a weakness, provided the methodology is rigorous, transparent and applied consistently.
Two non-negotiable lines
The first red line concerns controversial weapons. Any company involved in their production – including nuclear weapons – is excluded. No revenue threshold or mitigating governance score changes that. This position reflects established international standards and market practices.
The second is the distinction between passing an ESG screen and qualifying as a sustainable investment.
National security is a legitimate policy objective. Defence spending may be politically justified, and stable deterrence may support broader geopolitical stability. However, this does not make weapons manufacturing an activity that advances environmental or social outcomes in its own right.
A sustainability claim requires a demonstrable positive contribution. Simply not being excluded does not meet that standard.
Investable does not mean sustainable
Both extremes are difficult to defend. Excluding the entire sector, regardless of what an individual company does, ignores its diversity and undermines the purpose of ESG analysis. At the other end, presenting defence investment as inherently sustainable stretches the concept beyond its reasonable meaning.
The workable position lies between the two. Some conventional defence or dual-use companies may be investable following detailed analysis. This is fundamentally different from claiming that defence itself delivers a positive environmental or social impact.
Three principles underpin our investment process:
Zero tolerance for involvement in controversial weapons, including nuclear weapons;
Documented and regularly reviewed revenue thresholds for conventional defence exposure;
Enhanced governance scrutiny for dual-use companies, particularly regarding disclosure and controls over how their products are ultimately used.
This framework must evolve alongside market standards, European regulation – including SFDR and the EU taxonomy – and ongoing engagement with issuers.
Geopolitics changes, and sustainable finance must adapt to some degree. But adapting should not mean redefining the concepts on which its credibility depends. ESG is a discipline for assessing risk, not a label to be rewritten whenever the political climate shifts.
The credible position is therefore held between two fixed points: no compromise on controversial weapons and no confusion between passing an ESG screen and qualifying as sustainable.
