Europe’s Defense Push Puts Asset Managers in a Bind
In this section, authors comment on economic and financial topics.
This won’t be easy. France’s Prime Minister François Bayrou speaks of a «moment of truth.» In a bid to bring the country’s public debt under control, he has announced sweeping austerity measures: downsizing the civil service, merging government agencies, freezing public spending—pensions and social benefits included—at 2025 levels, and even eliminating two national holidays.
The objective is to significantly increase the defense budget without breaching EU deficit limits.
«There is no Longer Any Excuse»
Across the border, Germany’s Defense Minister Boris Pistorius is running out of patience. Despite brimming order books, Europe’s defense industry is delivering too slowly. «There is no longer any excuse,» he told the Financial Times. «The industry knows it is now responsible for delivering.»
Europe is ramping up its defense spending on a scale not seen since the Cold War.
«For institutional investors the new defense wave is a moral and strategic minefield.»
Ukraine and the U.S.’s growing reluctance to act as the world’s policeman are forcing European governments to rethink their security policies.
There’s a catch: most European countries are deeply indebted. To fund the expansion of the defense industry, they are turning to capital markets—and investors are taking note.
Political Pressure is Rising
For retail investors, this shift has already paid off. Rheinmetall’s share price, for example, has surged more than twentyfold over the past five years, creating substantial value.
Institutional investors meanwhile face a more complex challenge. The new defense wave is a moral and strategic minefield. Many funds and investment vehicles are bound by ESG guidelines that categorically exclude investments in weapons manufacturers—particularly those involved in controversial arms like cluster munitions or nuclear technologies. Additional normative frameworks, such as the UN Global Compact, also exclude entire sectors.
At the same time, political pressure is mounting from the other side. Defense is increasingly being viewed as a public good. French President Emmanuel Macron has called for an end to the blanket suspicion surrounding defense companies—even in the context of sustainable finance.
«Can sustainable investing afford to exclude defense when the goal is to protect democratic societies?»
NGOs like ExitArms remain wary. «Just because arms production is necessary doesn’t mean sustainability funds should invest in weapons,» says analyst Luca Schiewe. The defense industry has long attempted to present itself as ESG-compliant—with limited success, even before the Ukraine war.
Only to Exclude Manufacturers of Highly Controversial Weapons
Still, the counterargument holds weight: without security, there is no stability, no functioning markets, and no room for ESG principles.
Some asset managers are already adapting. They are redefining exclusion criteria more selectively—opting only to exclude manufacturers of highly controversial weapons, even if it means forgoing the ESG label. Others are sticking to stricter policies.
At the core remains a fundamental question: can sustainable investing afford to exclude defense when the goal is to protect democratic societies?
Adding an «S» For Security or Safety
This debate is also relevant in Switzerland. Last fall, the Swiss Bankers Association urged its members to approach defense-sector clients with a more «nuanced and individualized» lens—essentially advocating a more open stance in the national interest.
One possible solution for the investment industry: expand the ESG framework by adding an «S» for security or safety. ESG would become ESSG—with rules defined for the new «S» just as they are for environmental, social, and governance criteria. This could offer a middle ground for those who are not fans of the defense industry, but who view investments in population protection and defense technologies as legitimate—or even necessary—at this point in time.
Dominik Buholzer is CEO and Editor-in-Chief at finews.ch/finews.com
