Guns, Governance and Grey Areas: Responsible Investment and the Defence Sector

The global rearmament

The world is rearming. According to the IISS Military Balance, global defence spending reached a record US$2.63 trillion in 2025, with analysts projecting it will exceed US$3 trillion by year-end and US$3.6 trillion by 2030. Europe’s share has climbed from 17% to 21% in just three years, NATO has committed to a 5% GDP target, and the US defence budget is set to surpass US$1 trillion in 2026.

This flow of capital is creating significant investment and economic opportunity — but it comes with human context. War exacts enormous social and humanitarian costs, and the UN Secretary-General’s 2025 report noted that rising military expenditure has coincided with both deteriorating global security and declining progress toward the Sustainable Development Goals — in part due to the diversion of public resources away from healthcare, education and other essential services. This raises a key question. How should a ‘responsible’ investor approach the defence sector?

An emerging industry framework

This is a complex area with no single right answer, but across the global investment industry a broad tiered approach is taking shape — distinguishing between what should remain firmly excluded, what requires enhanced scrutiny, and where disciplined engagement is appropriate.

The EU’s 2025 Defence Omnibus, the UK FCA’s clarifying statement, and initiatives such as the new Guidance for Responsible Investment in Defence (GRID) — being developed by a coalition including Schroders, Amundi and the Church Commissioners — are all reinforcing this structure.

First — exclude controversial weapons. The term ‘controversial weapons’ refers to weapons prohibited or heavily restricted under international conventions because of their indiscriminate and long-lasting impact on civilian populations. This typically includes anti-personnel mines, cluster munitions, and chemical and biological weapons. These weapons are excluded because their effects cannot be reliably confined to military targets — unexploded cluster submunitions, for example, can kill civilians for decades after a conflict ends. Zero-tolerance exclusion is now standard practice across ESG-focused portfolios globally.

Second — apply enhanced scrutiny. Nuclear weapons, depleted uranium and white phosphorus sit in more contested territory. These are not classified as ‘prohibited weapons’ under the EU’s updated framework, and several major European investors have recently reintegrated weapons manufacturers in their portfolios. However, they remain excluded under many institutional policies, including Responsible Investment Association Australasia (RIAA) certification in Australia. Investors should assess the nature of involvement, the company’s trajectory, and whether manufacturers are expanding or proactively exiting.

Third — engage. It is worth recognising that defence is not solely about weapons. The modern defence sector encompasses cyber security, satellite communications, logistics, infrastructure and intelligence — much of it with dual civilian-military application. There are also legitimate ethical arguments around a nation’s right to self-defence; Ukraine’s defence against invasion is a case in point. Companies providing these capabilities can be appropriate holdings, but require active ESG scrutiny – and direct engagement from investors on these issues.

Defensive defence

Defence has performed strongly and carries genuinely defensive financial characteristics — stable government contracts, high barriers to entry, and structurally growing demand. Its supply chains are also materials-intensive, with copper, aluminium, titanium, rare earths and steel all critical inputs — reinforcing an already tight commodity picture alongside electrification and the energy transition. For investors, the opportunity is real. But so is the complexity. Sector-specific responsible investment guidance is only now being developed, and until those frameworks mature, investors will need to do their own work — clear and defined exclusions, active company engagement, and transparency around their approach.