It’s a question that concerns every asset manager: to what extent are defense and weapons stocks compatible with the sustainable principles of ESG? A joint report by the labeling organizations Forum Ethibel (Belgium) and LuxFLAG (Luxembourg) doesn’t provide a definitive answer but does outline the many dilemmas involved.
With the recent approval of NATO’s widely discussed 5 percent defense spending norm at the summit in The Hague, the outlook for arms and defense companies has never looked brighter. Investor interest in defense stocks has been notably high for several months now, as all asset managers confirm. Just last Friday, State Street announced the launch of a new defense ETF: the SPDR S&P Europe Defense Vision UCITS ETF.
A key question is whether asset managers will offer defense investments within or outside the framework of ESG criteria (Environmental, Social, and Governance). According to the report Weapons, War and ESG by Forum Ethibel and LuxFLAG, there is broad consensus in the sector that controversial weapons—such as landmines or chemical weapons—do not belong in ESG funds. However, the report adds an important caveat: there is currently no definitive and universally accepted list of what qualifies as a controversial weapon.
When it comes to conventional weapons—from grenades to fighter jets—there is far less agreement on whether they can be included in ESG portfolios. The two labeling organizations outline three possible investment approaches.
Approach 1: total exclusion
The first approach, adopted by asset managers such as Candriam, involves the full exclusion of conventional weapons from ESG funds. The central argument is that weapons are incompatible with the goals of sustainable finance, particularly the United Nations’ Sustainable Development Goals (SDGs).
Proponents of this view cite concerns that are social (weapons kill), environmental (the production process and end products are not always eco-friendly), and related to governance (the arms industry is opaque). They argue there is no room for compatibility with ESG principles and add that financing defense should be the responsibility of governments, not investors.
Approach 2: compatibility
The influential French defense industry sees things very differently. It argues that a strong defense has a deterrent effect that is essential for peace and, by extension, supports societal sustainability. This leads to a second investment approach, which allows conventional weapons in sustainable funds as long as they are not prohibited by international law. Proponents emphasize that current European regulations do not exclude defense from ESG considerations.
“Supporters of this view highlight that the defense sector plays a crucial role from an industrial and innovation standpoint and contributes to Europe’s security—which in turn creates the necessary conditions for sustainable development,” wrote Forum Ethibel and LuxFLAG.
Approach 3: strict selection
According to the report, a third, hybrid approach is also emerging. In this case, producers of conventional weapons may be included in sustainable funds only under strict conditions, following a rigorous due diligence process. In theory, this would apply to companies with dual-use production (for both military and civilian purposes) or firms focused solely on purely defensive technologies.
“This approach lies somewhere between the first two: it permits investment in conventional weapons but calls on investors to do so responsibly. Some financial institutions have adopted this strategy, but there appears to be no consensus on how to implement it in practice.”
The labeling organizations listed several of the practical challenges: “Unfortunately, there is no clear and globally accepted definition of offensive versus defensive weapons, or of ‘pure’ weapons versus dual-use technologies. Moreover, many companies operate across multiple sectors. And how do you measure the positive social impact of dual-use technologies?”
Conclusion
“This remains an open and complex debate with no clear solution for now,” emphasized Isabelle Delas (LuxFLAG) and Kenny Frederickx (Forum Ethibel). As such, the report does not advocate for a single position but instead calls for a nuanced and well-documented discussion—with the ultimate goal of enabling investors to make well-informed decisions in these uncertain geopolitical times.
The full study can be read [here].