The term „conflicting goals“ already carries a military connotation. Weapons are aimed at targets they are meant to destroy. Yet, the phrase also describes one of the most heated debates in asset management: Should a sustainable fund be allowed – or even required – to invest in defence stocks? Until a few years ago, this question was unthinkable. Sustainable funds committed to ESG criteria avoided defence stocks, especially companies involved in controversial weapons like cluster bombs or chemical weapons, which were considered fundamentally incompatible with sustainable investment strategies. However, this stance is shifting rapidly.

Since the beginning of the Ukraine war in 2022, the perception of defence within the ESG debate has fundamentally changed. According to one analysis, the value of defence stocks in funds increased from around 3 billion euros in Q1 2022 to nearly 8 billion euros by Q3 2024. This rise reflects not only the increasing share prices of major defence industry companies, but also a broader reassessment: The security of a nation and its people is increasingly seen as a social responsibility – and therefore as a legitimate component of ESG criteria. Defence budgets are growing significantly, with Germany, for example, planning to allocate an additional 30 billion euros annually to its armed forces from 2028 onward.

The European Union is actively shaping this reassessment. Once primarily focused on environmental and social aspects, ESG criteria are evolving. Defence products are no longer automatically deemed unethical, but are instead being reevaluated under the lens of security and peacekeeping. Major asset managers, such as DWS, are following this shift, though they continue to apply differentiated investment restrictions for ESG funds with strong sustainability preferences.

Industry associations – including the German Investment Funds Association (BVI) – have agreed that ESG funds may now invest in conventional weapons manufacturers, provided they do not produce internationally banned weapons. This aligns with the argument that there can be no sustainability without security – an increasingly common perspective in asset management.

The inclusion of defence industry stocks in investment portfolios is not just a theoretical discussion – it is reflected in actual financial products. For some time now, ETFs have been available that focus on this sector, such as the iShares Global Aerospace & Defense ETF.

Despite these regulatory shifts, the ESG debate remains highly controversial. Critics argue that including defence stocks in sustainable funds dilutes the original purpose of ESG. One fact remains clear: Wars generate massive CO2 emissions. A study found that in just seven months, the direct emissions of the Ukraine war amounted to 100 million tons of CO2 equivalents – comparable to the total emissions of the Netherlands over the same period.

Organisations like Scientists for Global Responsibility highlight that around 5.5% of global greenhouse gas emissions come from military activities. If the world’s armed forces were a country, they would be the fifth-largest CO2 emitter – behind China, the US, India, and Russia. These figures underscore the tension between security and environmental responsibility. Investors must decide: Is defence a legitimate part of sustainable investment strategies, or does ESG remain credible only without the defence industry?

The discussion on ESG investments in defence must take place. ESG is no longer just about being „green“ – it is more geopolitical and economically driven than ever before. In the end, the choice remains with the investors.