As Europe boosts defence spending and investors adapt to geopolitical uncertainty, Allianz Global Investors has adjusted its sustainability criteria to include certain defence-related investments. Firms with more than 10 percent of their turnover from defence equipment and those that produce nuclear weapons now are considered eligible.
The change was decided in April and backed by an internal roundtable that included Allianz GI’s chief executive officer. It reflects a nuanced shift within the EU’s Sustainable Finance Disclosure Regulation (SFDR) framework, but the firm is clear: these investments are not considered sustainable.
“It’s one of the key client topics right now. It’s everywhere,” said Matt Christensen, global head of sustainable and impact investing at Allianz Global Investors, during the firm’s Media Days in Frankfurt. “It is not considered sustainable, but defence as a topic tends to touch on what is eligible to think through for the protection of civic society. Civil society topics often end up as sustainability discussion topics.”
Christensen explained that the relevance of defence for the societal protection has brought it into the investment discussion. “Sustainability often touches what I think of as mainstream fabric discussions of society, of which defence has been one this last 18 months,” he added, answering a question by Investment Officer.
Discussions on whether or not to include defence investments in SFDR Article 8 funds, considered ‘medium’ in terms of sustainability or ESG, first started two years ago, triggered by Russia’s invasion of Ukraine in February 2022.
Earlier this year, the European Commission said that the EU needs to invest heavily in its defence capabilities, presenting a plan to mobilize at least 800 billion to boost spending, particularly in the wake of Russia’s war against Ukraine and calling on the private sector to contribute. This includes increasing defence spending to 2 percent of GDP and accelerating the production of weapons. NATO is discussing raising defence spending requirements to 5 percent of GDP, as part of a proposal to be discussed at its June summit in The Hague.
Eligible but not sustainable
The revised policy of Allianz affects two core exclusions: the 10 percent revenue cap on military equipment and services, and nuclear-related activity under the Non-Proliferation Treaty (NPT), the firm explained in a note to investors published on Monday. These restrictions are now lifted for most Article 8 funds, giving managers discretion to consider selected defence companies, though these exposures will not count toward the funds’ sustainable investment share.
The revisions means that certain Article 8 SFDR will be eligible for investing in companies like Airbus, which is the prime contractor for ballistic missiles used in the French nuclear arsenal, and weapons systems producers such as Rheinmetall, Leonaro and Thales.
Investments in Article 9 funds - which must have a sustainability objective - remain subject to Allianz’s strictest exclusion rules. “What we’re saying is that defence investments are not sustainable. However, certain defence activities can become eligible for most of the Article 8 funds,” Christensen clarified. “In those Article 8 funds that are most oriented towards sustainable investing as a solution, [defence eligibility] is still not being extended.”
According to Allianz, the policy shift reflects a measured response to changing client expectations, based on feedback received through its fund managers. “The reaction was, well, it doesn’t capture all the defence stocks they’d still like to invest in,” Christensen said. “But it allows us to better compare and think about which ones might still be an interesting investment for the next three to five years.”
The firm continues to exclude investments in anti-personnel landmines, cluster munitions, depleted uranium and white phosphorus across all funds.
Regulatory alignment
The firm’s stance aligns with the European Commission’s White Paper for European Defence – Readiness 2030, which calls for stronger public-private cooperation in financing Europe’s defence capacity. It also mirrors recent clarification from the European Securities and Markets Authority (ESMA), which removed conventional defence from the baseline exclusion criteria for ESG-labelled funds.
Christensen, who recently addressed the European Parliament on SFDR reform, called for simplification — but not deregulation. “We really do not want to throw out the baby in the bathwater,” he said.
He also emphasised the importance of maintaining key pillars of the EU’s sustainable finance framework, including double materiality and corporate disclosures for firms with more than 500 employees. “Europe is looked at as a leader on regulation and sustainability. Taking it too far into simplification leaves behind a whole leadership role,” he warned.
Natixis takes another view
After Allianz communicated its decision to investors, several other major asset managers also lifted their ban on including defence investments in Article 8 funds, including UBS and DWS. Paris-based Natixis recently also reported demand from certain clients to have defence investments included in Article 8 ESG funds. At a recent event in Paris, Natixis executives said that sustainable finance should evolve with societal needs, including national security, while acknowledging the ethical concerns around arms exports and human rights.
One Natixis executive stressed the importance of client engagement: “Some will understand the approach but refrain from investing in the defence industry. Others will agree that investing helps protect ourselves.”