European ESG funds rapidly increase defence holdings amid diverging sustainability views

The question of whether investment funds that market themselves as sustainable should hold stakes in defence firms has moved from theoretical debate into market practice, with contrasting views from asset managers mirrored by fresh industry data showing rising defence exposure in European ESG-labelled products.

Carmignac’s head of sustainable investment, Lloyd McAllister, told The Luxembourg Times that most of the firm’s Article 8 funds are permitted to invest in conventional defence, subject to rigorous scrutiny of end‑use. “The majority of our article 8 funds can invest in conventional defence,” he said, and added that while conventional defence is allowed across much of the firm’s Article 8 assets, “100% of our AUM cannot invest in controversial weapons.” McAllister argued that some investors focused on long‑term societal resilience view a credible defence capability as compatible with sustainability objectives, and he expects gradual acceptance of defence positions even within funds labelled Article 9, provided robust due diligence is applied.

Not all managers share that perspective. Hadewych Kuiper, managing director at Triodos Investment Management, told The Luxembourg Times that private capital should not underwrite weaponry and that such investments sit at odds with sustainable goals. “As an article 9 investor, we reject investments in weaponry in our sustainable portfolios,” she said, arguing that weapon production undermines human rights and dignity and noting the opacity that often surrounds defence supply chains.

Independent research confirms a shift towards greater defence exposure in ESG funds across Europe. According to MSCI, as of 31 May 2025 a large majority of sustainable funds held positions in defence‑related companies, with 77% of Article 8 funds and 66% of Article 9 funds showing some exposure to firms connected to conventional or controversial weapons. Sustainalytics likewise reports that exposure to aerospace and defence stocks among Article 8 European equity funds climbed significantly following Russia’s invasion of Ukraine, reaching an average of 2.5% for active funds and 1.2% for passive funds by mid‑2025.

ClarityAI’s analysis points to a rapid increase in defence allocation within Article 8 European equity funds between late 2024 and the end of 2025, with average defence exposure rising by almost 60% from 0.9% to 1.42%. German market data from the BVI show a pronounced national tilt: following regulatory clarifications in late 2024, the asset‑weighted share of aerospace and defence companies in German Article 8 funds rose from 0.8% at the end of 2024 to 1.3% by June 2025, with some German‑focused products allocating materially more to names such as Airbus and Rheinmetall.

Asset manager policies have been evolving in response. Allianz Global Investors has said it no longer treats defence investments as per se “sustainable investments” under the EU framework while continuing to bar controversial weapons, describing its changes as a response to client expectations and regulatory shifts. In a more sweeping move, JP Morgan Asset Management removed defence exclusions from a swathe of UK and European funds in January 2026, lifting revenue‑based thresholds and enabling investment in companies engaged in conventional defence across many Luxembourg‑ and Ireland‑domiciled vehicles.

The divergent positions reflect deeper tensions about the definition and purpose of sustainable finance. For some investors and managers, sustainability mandates are primarily environmental or social impact tools that should categorically exclude armaments. For others, sustainability encompasses the resilience and security of societies, and so a carefully screened defence allocation can be argued as consistent with long‑term stability objectives.

Practically, the industry faces two questions: where to draw lines between controversial and conventional defence, and how to make end‑use transparency sufficient to satisfy ethical and regulatory demands. Regulators and data providers have stepped into that space by clarifying exclusions and improving reporting, but asset managers say gaps in supply‑chain transparency and the complexity of arms financing remain obstacles to uniform policy.

As the market adjusts, investors will increasingly confront trade‑offs between ethical consistency and geopolitical or portfolio considerations. Industry data show the trend is already material: sustainable funds, particularly those under Article 8, are becoming more exposed to defence names, while Article 9 funds remain a flashpoint for stricter exclusionary approaches. The debate is therefore evolving from academic disputation towards practical policy choices by managers, index providers and regulators about how to reconcile sustainability labels with national security concerns and investor values.