As governments accelerate spending and security priorities shift, private capital is moving deeper into the defence ecosystem. For institutional investors, the change is testing assumptions about risk, responsibility and their role in delivering security and resilience.
For much of the past decade, defence sat in a relatively simple exclusion box for institutional investors. Defence contractors could be screened out with loose associations with controversial weapons, widely viewed as incompatible with ESG frameworks, reputational risk management and, in some cases, fiduciary duty itself. That position is now under sustained pressure.
Russia’s invasion of Ukraine, deteriorating European security and renewed government pressure on defence spending have forced asset owners and managers to re‑examine assumptions that once appeared settled. The enhanced financial commitment from NATO allies agreed in 2025 confirmed the scale of capital required.
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What is emerging is not an abandonment of responsible investment principles, but a more complex and nuanced debate about where ethical responsibility sits, how risk is defined and whether long‑standing exclusions remain workable in a world of dual‑use technology and heightened geopolitical tension.
As Mike Clark, founder director at Ario Advisory, argues, defence sits firmly in the realm of public policy rather than market optimisation, because “societal risk and opportunity are a very different risk paradigm from financial risk”. He draws a similar distinction for net zero.
Societal risk and opportunity are a very different risk paradigm from financial risk.
Mike Clark, Ario Advisory
Reassessing the consensus
The original case for excluding defence was, for many investors, straightforward. Weapons were seen as ethically problematic, difficult to reconcile with sustainability objectives and unnecessary in a world assumed to be moving, however imperfectly, towards greater cooperation.
The UK’s Financial Conduct Authority clarified in March 2025 that exclusions were a matter of investor choice, not regulation, noting that its sustainability rules do not prohibit investment in defence companies. As Jones Day legal analysis at the time observed, some investors “routinely” exclude defence companies “whether for sustainability or ethical concerns or otherwise”.
Clark describes historical defence exclusions as a form of “lazy” moral shorthand. “There’s been this view – guns are bad, therefore we shouldn’t invest in them. But it’s more nuanced than that. Defending a country shouldn’t necessarily be seen as a bad thing.”
Elizabeth Carey, an independent investment adviser to the Bedfordshire Pension Fund among others, is more forthright. “I have never believed in the peace dividend,” she says. “People were kidding themselves – wilfully blinding themselves.” From Russia’s military build‑up to growing competition in the Arctic, she argues the warning signs were visible long before 2022. “It was blatantly obvious from public information sources. You didn’t need classified intelligence – just an internet connection.”
In that context, Carey describes historic defence exclusions as “virtuous but wrong – and ultimately self‑defeating”. Europe, she argues, benefited from US defence spending while convincing itself that abstention equated to ethical superiority. “Europeans were tailgating on US defence budgets, feeling morally superior, and now we see where that’s got us.”
However, Natalie Winterfrost, a director at Law Debenture, stresses that the reality inside pension schemes was often more nuanced than headline exclusions suggested. “It appears to be a common perception that pension schemes ‘screen out’ investments in weapons through their responsible investment processes. This really isn’t the case,” she says. In practice, most large schemes focused on a narrow set of controversial weapons already prohibited by international conventions, representing “a very small part of the investible universe”.
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Ethics and fiduciary duty
As defence returns to the agenda, a central question has been whether institutional investors should be making moral judgements at all. Clark is clear that governments, not markets, are the primary arbiters of societal values. “Governments make laws. There’s non‑financial regulation. Investor decision‑making is separate and different from the rules governments make.”
The problem, he argues, is that over recent decades governments have increasingly delegated those boundary‑setting decisions to finance, particularly on climate. “Finance has become the dominant decision‑maker by default. Financial risk modelling has no moral authority, yet it’s running the world.”
While climate change can be framed as an investment risk, Clark sees defence differently: “Climate is clearly a financial risk. Defence is 90% societal risk.” In other words, climate risk may be priced by markets, but defence risk largely cannot.
Carey agrees that investors should not pretend to be policymakers. “You can’t keep blaming the kit. You have to focus on governance, rule of law and accountability,” she says. “Sanctions work – but only if you police them properly. That’s not an investor’s job. Investors shouldn’t pretend to be quasi‑governments.”
Bobby Riddaway, chair and founder of the Trustee Sustainability Working Group, frames the issue as one of unavoidable trade‑offs. “It is very similar to the point from sustainable finance and the energy transition where it has become clear that it is all about choices,” he says. “No choice is all good or bad, so there is no wholly right answer when thinking about investing in defence.”
That reassessment increasingly mirrors public policy. Nick Langley, head of real assets at ClearBridge Investments, a specialist investment manager of Franklin Templeton, says Europe has entered a structurally different security era. He points to NATO’s June 2025 commitment for allies to invest 5% of GDP annually by 2035, with at least 3.5% for core defence and up to 1.5% earmarked for resilience‑related spending.
“The strategic question for investors is no longer whether security spending will rise,” Langley says. “It’s how the spending translates into investable assets, and how to access those assets with a risk-return profile that fits the long‑duration investment requirements of pensions, insurers, sovereigns and wealth platforms.”
Adds Winterfrost: “With increased defence budgets across Europe and other friendly nations, the investment case appears strong.”
Peace through strength isn’t a slogan – it’s reality
Elizabeth Carey, independent advisor
Dual‑use technology
Even where investors want to maintain exclusions, practical implementation has become increasingly difficult. Much of today’s defence capability is built on technologies that are indistinguishable from civilian applications.
Carey points to the blurring of boundaries. “Technology has moved on. Western landmines now have self‑deactivating mechanisms. War has become precision‑based, drone‑led, almost gamified.” In that context, she asks, “What’s the difference between a drone delivering an Amazon package and one delivering a weapon? Or facial recognition that speeds you through an airport versus the same technology used for repression?”
Andrew Bloxam, partner in ventures at Foresight Group, has seen this tension play out in investment committees. “Most technologies have both defensive and offensive capabilities,” he says. “Trying to draw a clean line just doesn’t make sense.” He recalls cases where companies were rejected because as little as 1% of revenue could be defence‑related. “That approach doesn’t hold up anymore.”
Langley says this is already reflected in how investors reinterpret sustainability policies. “All investors we have spoken to have undertaken some level of review to understand the different types of defence exposures they have in their portfolios, including indirect exposures through private markets funds,” he says.
In many cases, this has meant blanket “weapons” exclusions being narrowed to “controversial weapons”, with the previous shorthand of “‘yes to survivability’ and ‘no to lethality’ being downgraded or, in some cases, abandoned altogether”.
Some bans, Langley adds, will remain necessary for regulatory or risk reasons. But others require more judgement. “An investment in a drone manufacturer or facility may involve offence, defence, intelligence gathering or logistics,” he says, contrasting this with investment in facilities producing components for weapons systems.
Winterfrost notes that many schemes already take a pragmatic approach, focusing on end‑use rather than category bans. “Pension schemes as a whole focus on financially material ESG factors, not ethical ‘non‑financial’ ones,” she says, adding that scrutiny is increasingly directed at whether weapons cause “disproportionate or indiscriminate harm”, and whether their use and supply chains comply with international law.
A multi‑million‑pound MoD contract can be game‑changing for a small company.
Andrew Bloxam, Foresight
Defence and deterrence
Perhaps the most sensitive part of the debate is whether defence can be reconciled with the underlying goals of ESG. For Carey, the answer is unequivocal. “The failure to arm Ukraine quickly and sufficiently is why we’re nearing the fourth year of this war,” she says. “Peace through strength isn’t a slogan – it’s reality.”
She frames defence investment not as a contradiction of sustainability, but as a prerequisite for it. “If you believe in rule of law, democracy and predictable enforcement – that’s SDG 16 Peace, Justice and Strong Institutions – defence is their bedrock.” Without security, she argues, “you don’t have any of the other benefits”.
Clark approaches the issue from a risk perspective rather than a moral one. Pension funds, he argues, cannot avoid taking a view. “Not taking a view, is taking a view.” If fiduciary duty extends to members’ long‑term outcomes, it inevitably brushes up against national security.
Winterfrost observes that rhetoric within the pensions industry is already shifting. “Investing in weapons wasn’t thought of as an impact investment, but discussions now are recognising the importance of defence as a social good – for national security as well as for protecting the people and infrastructure of other vulnerable nations.”
The opportunity is not simply to ‘buy defence’. It is to finance and own the foundational real assets that make deterrence and resilience possible.
Nick Langley, ClearBridge Investments
Investment targets
If defence investment is being reconsidered, private markets are likely to play a disproportionate role. Foresight has long invested in deep tech and venture-backed SMEs, many of which operate at the intersection of technology and the needs of the defence sector. “To date, we’ve invested opportunistically into sectors that provide security and resilience. Defence hasn’t been a specific focus,” says Bloxam. “But over the last couple of years, we’ve seen growing demand for investment – and growing acceptance.”
That shift has been visible at portfolio company level. “Five years ago, if a company had the choice between a health contract or a defence contract, there was a real concern about recruitment… If defence was the first thing you were known for, you wouldn’t be able to attract talent ,” he says. “That’s starting to change.”
Government behaviour has also altered the investment equation. Across Europe, defence budgets have risen and procurement cycles have accelerated. “A multi‑million‑pound MoD contract can be game‑changing for a small company,” Bloxam says. “Once those contracts are awarded, investors gain confidence. That makes the opportunity more investable and less risky.”
Langley argues the opportunity is particularly pronounced in real assets and infrastructure. ClearBridge, active in European social infrastructure since 2005, is now exploring security and resilience investments that are “social‑infrastructure adjacent”. These include defence maintenance facilities, logistics and warehousing, hardened power systems, rail line spurs, and manufacturing facilities backed by defence contracts. On the resilience side, the focus extends to dual‑use transport, energy and digital infrastructure, strategic storage for food, medicines and fuel, and emergency response networks.
“The opportunity is not simply to ‘buy defence’,” Langley says. “It is to finance and own the foundational real assets that make deterrence and resilience possible.” The NATO commitment, he argues, effectively turns security into a multi‑decade infrastructure programme, creating long‑duration, inflation‑linked cash flows aligned with pension and insurance liabilities.
Clark cautions against framing the issue as public versus private markets. “Public versus private markets is a false divide. What matters is what activity is being financed.” Asset owners, he notes, are ultimately allocating capital towards economic activity, whether that takes place in listed or unlisted form.
Investor acceptance
Despite the shift in tone, investment behaviour appears to be changing more slowly than sentiment. “There’s a lot of talk, but not much action yet,” Bloxam says, noting that Nordic investors have moved faster than many of their European peers.
Carey sees trustee attitudes evolving, albeit unevenly. “There are no more sacred cows. People are more open to honest discussion – but there’s still a lot of resistance from those who prefer conventions, because they don’t have to think.”
Langley also sees wide variation in what investors consider acceptable. “We are seeing a range of views as to what is ‘acceptable’, and ultimately these need to be balanced, for the majority, with investment outcomes,” he says. While some areas are likely to remain no‑go zones, he notes that allocating private capital to infrastructure and real assets can, in practice, free up public markets and government funding for more controversial areas of defence spending.
For Winterfrost, the likely direction of travel is greater precision rather than wholesale reversal. Exclusions, where they remain, are likely to become narrower and more focused on specific harms, while engagement and supply‑chain scrutiny take on greater importance.
What is clear is that defence can no longer be treated as a peripheral ethical question or a simple screening decision. For institutional investors, particularly those allocating to private markets, it is testing whether ESG frameworks can adapt to a more contested and dangerous world without losing credibility.
The reassessment now under way is less about abandoning principles than about applying them with greater realism. As governments reassert the centrality of security, investors are being forced to confront the limits of delegation, the inadequacy of binary exclusions and the challenge of weighing societal risk alongside financial return. As Clark concludes, there may be no universally correct position – only better or worse decision‑making. “I can’t make the decision for you. There’s no right or wrong answer.”