A new paradigm—"sustainable security"—has raised its head. For a long time, global ESG investors treated investment in the defense industry as taboo on the grounds that it was "unethical." In ESG investment governed by sustainability regulations, the defense industry was excluded all the more. However, for reasons such as the prolonged "Russia-Ukraine War" and the ever-present threat of conflict in the Middle East, countries within Europe are showing a movement to re-examine their stance on defense-industry investment. In particular, as Trump's withdrawal from NATO (North Atlantic Treaty Organization) and the possibility of a change in the U.S. defense commitment have come up as topics related to diplomacy and security, Europe is changing the way it views the defense industry—if only as a matter of preparation.
The "Institute for Economics and Peace (IEP)"—a global think tank headquartered in Sydney, Australia, with branches in major cities around the world—announced that, as of 2024, the past three years had been the most violent era of the past 30 years. The cost the world spent on war and localized conflict during this period reaches an enormous scale of 14 trillion dollars a year. In 2024, too, global defense spending surged amid growing international threats. Europe's defense spending, including Germany's, rose by as much as 16–17%. Against this backdrop, related stock prices such as European defense-sector ETFs (Exchange Traded Funds) have risen sharply, and the re-evaluation of defense investment is also gaining momentum.
[Growth trend of Europe's defense-industry ESG funds ©FT (data source: Morningstar Direct)]
Defense-Industry Investment: Unethical vs. a Method for Strategic Sustainability
The defense industry, because of the calamities wrought by "lethal weapons," has long been classified as an unethical sector and excluded from ESG investment. But for the sake of guaranteeing the safety of the nation and society, the defense industry cannot simply be excluded. Currently, European countries, major sovereign wealth funds, and financial supervisory authorities are expressing the perception that the defense industry is not a mere "war industry" but an essential industry for social stability and strategic sustainability. This past March, the UK's Financial Conduct Authority officially announced that "sustainability-related regulations do not prohibit investment in a particular industry." Saying that the decision of whether to invest in defense firms is left to individual financial institutions and investors, it put forward a policy that in effect expands investment in, and financial support for, the defense industry.
Not only in the UK but also in Norway, political pressure is growing that restrictions on defense investment hinder national security and economic growth. Norway—which for more than 20 years has banned investment in major defense conglomerates—recently came to discuss easing the rules precisely because it could not ignore this flow of change. Furthermore, the European Union (EU) is discussing measures to classify the defense industry as a "strategic sustainability industry" or to reflect a "contribution to security" in the ESG evaluation system.
Domestically, too, the establishment of ESG-management evaluation standards and incentive measures for defense firms is being pushed. Major defense companies such as Hyundai Rotem, Hanwha, and LIG Nex1 are also strengthening ESG management—developing eco-friendly technologies, reducing greenhouse gases, and improving governance.
[Growth trend of Europe's defense-industry ESG funds ©FT (data source: Bloomberg)]
Restrictions on Inhumane Weapons... Responsible Investment Standards Are Needed
The boundary that had been erected between ESG investment and the defense industry is increasingly likely to be gradually dismantled. Governments and regulators of various countries are easing regulations on financing for the defense industry, and investors, too, are moving in a direction that considers sustainability and security together. That said, the UN Human Rights Council, while acknowledging the re-examination of defense-industry investment, strongly argued that companies that produce or sell "cluster munitions, landmines, and chemical weapons"—inhumane weapons banned under international law—must absolutely be excluded from investment. It also stressed that human-rights due diligence and environmental-impact assessment for the defense industry as a whole are essential.
On the other hand, Mollie Thornton, senior investment manager at the UK ESG-focused investment firm "Parmenion," argued that the defense industry should continue to be excluded from investment targets, citing the point that it generates serious ESG risks such as human-rights violations, political instability, and environmental pollution. This is because it is in effect impossible to control the final end-use of the weapons produced through defense-industry investment and the possibility of human-rights violations. She posed a weighty question: "The need for defense is clear. But who can judge who the 'good forces' are? How can investors be sure that weapons will not fall into the hands of the wrong forces?"
In this way, global ESG investors and related institutions are trying to break the existing taboo on defense-industry investment, citing the importance of security. Whether this turns out to be the right thing for the better future we hope for will be confirmable only after time passes. Even if the opportunities and scale of defense-industry investment are expanded, the point that—like other industries striving to do so—it must provide sustainable solutions that align with ESG-based ethical values will operate as a key criterion for judgment.
by Editor N