- Defence was once one of responsible investing's simplest exclusions. Today, rising geopolitical tensions and growing concerns about national resilience are forcing investors to rethink old assumptions.
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Not all defence exposure is the same. The key distinction increasingly being drawn by investors is between prohibited weapons and conventional defence capabilities that may support the protection of democratic institutions, critical infrastructure and civilian populations.
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Responsible investors need disciplined judgement, not simple labels. A robust approach should retain clear red lines for weapons associated with unacceptable humanitarian harm. As AI, drones, satellites and cyber technologies blur the boundary between civilian and military applications, investors need more sophisticated tools than simple exclusion screens to navigate the sector responsibly.
For years, defence stocks were among the easiest exclusions in responsible investing. Today, that consensus is breaking down. As geopolitical tensions rise and governments prioritise national security, investors are increasingly asking whether defence can play a legitimate role within responsible portfolios. Defence was often treated as a straightforward exclusionary category, particularly where weapons exposure was seen as inconsistent with social objectives or values-based investment approaches. That position has become more difficult to apply uniformly. The geopolitical environment has changed, defence budgets are rising, and policymakers increasingly view military readiness, critical infrastructure protection and supply-chain security as part of national and social resilience.
This does not mean defence has become an uncomplicated fit for responsible investing. Rather, it means investors are being asked to make more careful distinctions. A responsible investment approach could distinguish weapons that are prohibited or widely restricted because of their humanitarian impact from conventional defence capabilities that may be lawful, strategically important and, in some cases, linked to the protection of civilians or democratic institutions. The challenge is to apply ethical, human rights and risk-management principles with enough discipline to avoid simplistic conclusions in either direction.
A changing market backdrop
Three forces are changing the debate:
1: A less stable world
2: Significant policy shifts
3: A broader assessment of resilience
Defence investment has become more prominent because the security environment has materially changed. Russia’s invasion of Ukraine, continuing conflict in the Middle East and heightened tensions across the Indo-Pacific have reinforced the view that governments need to rebuild military readiness and strengthen domestic defence-industrial capacity. In Europe, this has translated into a marked shift in policy. NATO states have moved beyond the long-standing 2% of GDP defence-spending benchmark, with allies committing at the 2025 Hague Summit to invest 5% of GDP annually in defence and broader security-related areas by 2035. NATO has also reported that European allies and Canada increased defence expenditure by nearly 20% in real terms in 2025 compared with 2024*. These recent defence spending commitments have largely been credited to US President Trump’s sustained pressure on allies over burden-sharing and his reluctance to automatically provide US security guarantees.
For markets, this creates a clearer structural demand signal. Areas such as air and even space defence, surveillance, logistics, naval systems and dual-use technologies are increasingly being framed as strategic priorities rather than discretionary spending. The investment case for parts of the sector is therefore less dependent on a short-term cycle and more connected to multi-year procurement plans, industrial capacity expansion and government policy support.
Investor behaviour has started to reflect this change. Sustainable and ESG-labelled funds in Europe have increased exposure to aerospace and defence since the beginning of the war in Ukraine, particularly among Article 8 funds, which promote environmental or social characteristics. Morningstar Sustainalytics has noted that Article 8 funds have materially increased defence exposure while remaining, on average, underweight relative to conventional funds**. MSCI has similarly observed that many Article 8 and Article 9 funds already have some exposure to conventional defence-related activities, even where controversial weapons exclusions remain widely applied***.
What does this mean for New Zealand? Clearly a larger fiscal cost through increased defence spending. We have a growing demand for defence-adjacent technologies and direct investment in cybersecurity, surveillance and dual-use technologies. Developments in orbital and space defence bring potential conflict closer to home and dual use spending becomes the norm. For instance, a satellite can help co-ordinate disaster relief and also provide defensive military services.
Why responsible investors are reconsidering the sector
The responsible investment debate is shifting from a binary question - whether defence is investable or not - toward a more nuanced assessment of what a company does, who its products are supplied to, how those products are used and what safeguards are in place. This reflects a broader recognition that security can be a precondition for the protection of rights, democratic institutions and civilian populations. Defence capabilities may support deterrence, territorial integrity, peacekeeping logistics, or the protection of critical infrastructure.
At the same time, the sector carries inherent social and human rights risks. Weapons and military systems are designed for contexts where harm may occur, and even lawful defence products can contribute to civilian casualties, escalation or misuse if they are supplied to inappropriate end-users or weakly governed markets. This is why responsible investors generally need more than a sector label. They need a way to assess severity, likelihood, proximity to harm and the quality of company governance.
Is there a distinction? Controversial weapons versus conventional defence
A useful starting point is the distinction between controversial weapons and conventional defence. Controversial weapons are generally understood as weapons prohibited or widely restricted under international treaties, conventions or humanitarian norms because of their indiscriminate effects, disproportionate civilian impact, or long-term humanitarian and environmental consequences. Common examples include anti-personnel landmines, cluster munitions, chemical weapons and biological weapons. Many responsible investment policies also treat nuclear weapons, depleted uranium, white phosphorus or other categories as controversial, depending on the policy framework applied.
Conventional defence is broader. It can include aircraft, naval vessels, armoured vehicles, radar, communications, surveillance systems, logistics, software, components and maintenance services. These activities are not automatically prohibited under international law, but they can still raise serious responsible investment questions depending on their end-use, lethality, customer base and governance controls.
This distinction is also increasingly reflected in regulation. In the European Union, recent sustainable finance developments have narrowed parts of the automatic exclusion framework from the broader and less consistently defined term “controversial weapons” to “prohibited weapons”, focused on categories banned under major international conventions****. This clarification does not require sustainable funds to invest in defence companies, but it does signal that the defence sector as a whole is not automatically incompatible with sustainable finance. It also leaves room for investors to apply broader exclusions where these reflect values, risk appetite or mandate design.
Dual-use technology adds further complexity
The boundary between civilian and military technology is becoming less clear. Satellite systems, drones, artificial intelligence, sensors and navigation tools can all have both civilian and military applications. These dual-use technologies may support disaster response, logistics, telecommunications or infrastructure resilience, while also being used in surveillance, targeting or military operations.
For responsible investors, dual-use exposure requires a more granular approach than simple revenue classification. Relevant factors include the materiality of defence-related revenue, whether the technology is specifically designed or modified for military use, the nature of the customer base, contractual controls, evidence of misuse and the company’s ability to monitor downstream applications. The more a product is tailored to lethal or coercive use, the higher the scrutiny should be.
For example, a high-resolution earth-observation satellite can support clearly beneficial civilian uses, such as monitoring natural disasters, tracking illegal fishing, improving climate-risk modelling or restoring communications after severe weather events. The same core capability, however, may also be used by defence customers to monitor troop movements, identify critical infrastructure or improve battlefield awareness. The responsible investment question is therefore not simply whether the technology is “civilian” or “military”, but how material the military use is, whether the product has been modified for defence applications, who the end-users are, and what controls exist to prevent misuse.
Navigating the defence debate
The key takeaway is that defence is no longer viewed uniformly across responsible investment strategies. Some funds may continue to exclude all weapons-related exposure. Others may exclude controversial or prohibited weapons while permitting some conventional defence exposure subject to due diligence. Others may treat defence as part of a broader security and resilience theme. None of these approaches is inherently free of trade-offs.
Defence exposure should not be assessed only through a market opportunity lens, but nor should it be dismissed without considering the changing security environment and the legitimate role that some defence capabilities may play.
Finding the right balance
The defence sector illustrates the growing complexity of responsible investing in a more fragmented world. Rising geopolitical risk has made national security, resilience and industrial readiness more financially and socially relevant, while the sector’s core purpose continues to raise serious ethical and human rights questions. A robust responsible investment approach should therefore avoid both blanket assumptions and uncritical acceptance.
The most defensible path is one that maintains clear red lines for weapons associated with unacceptable humanitarian harm, while applying disciplined, evidence-based analysis to defence exposure that contributes to security and resilience.
* - Defence investment and NATO’s 5% commitment | NATO Topic
** - EU ESG Funds’ Exposure to Defense Continues to Increase
*** - Rethinking Defense Exposure in Sustainable Funds | MSCI
**** - Commission Delegated Regulation (EU) 2025/1775 of 28 August 2025 amending Delegated Regulation (EU)