As Europe faces mounting geopolitical pressures and shifting security concerns, the investment landscape is evolving. For years, European asset managers have maintained strict policies against investing in the defense sector, often citing sustainability principles and ethical concerns.
However, a combination of political pressure and the European Union’s push for increased defense spending is forcing a reassessment. Financial strategists from Fibovest explore the complex dynamics shaping Europe’s evolving stance on defense stocks and what it means for investors
The Changing Stance on Defence Investments
European asset managers have long adhered to ESG (Environmental, Social, and Governance) principles, excluding military-related stocks from their portfolios. Under EU sustainability regulations, funds labeled as “responsible investments” must ensure they do not cause significant harm. This has led to the exclusion of companies like Rolls-Royce and Airbus, despite their involvement in commercial aviation.
However, the investment climate is shifting. Following recent comments from America’s current president urging Europe to take greater responsibility for its own security, EU leaders have outlined plans for an 800 billion euro ($870 billion) military investment push. As defense budgets expand, the sector is becoming too important for investors to ignore.
Major Asset Managers Adjusting Their Policies
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Some of Europe’s largest financial institutions are already revisiting their approach to defense investments. Legal & General (LGEN.L), the UK’s largest investor, has noted that the sector’s appeal has “risen dramatically” due to geopolitical instability. As a result, it is planning to increase its exposure to defense-related stocks.
Other major players, including UBS Asset Management, have also begun reviewing their policies. UBS has confirmed that it is reassessing its exclusions on defense investments across multiple funds. Meanwhile, Mercer, a global consultant advising pension funds, has reported a growing interest from institutional investors in adding defense stocks to portfolios.
The market’s response to the EU’s rearmament efforts has been significant. European aerospace and defense companies, such as Germany’s Rheinmetall and Italy’s Leonardo, have seen their stock prices hit record highs. Investors who previously avoided the sector are now questioning whether they missed a major opportunity.
Political Influence and Ethical Dilemmas
European governments are increasingly advocating for defense investment. In the UK, politicians have urged financial institutions to support the military sector, while France has proposed loosening ESG-related restrictions on defense-related loans.
Norway’s central bank has also suggested that ethical investment standards may need to be reconsidered in light of rising security concerns. This shift is also being driven by investor sentiment. Many clients now believe that Europe must strengthen its own military capabilities and are asking asset managers to reconsider their exclusions on defense.
However, ethical concerns remain a significant factor. While bans on investing in controversial weapons—such as biological arms—are widely upheld, the broader defense sector remains a gray area. Some financial experts argue that supporting defense companies does not align with ESG principles, while others believe that national security is a critical part of responsible investing.
A Shift in ESG Fund Allocations
Historically, ESG-focused funds have been less inclined to invest in defense stocks due to the sector’s association with weapons manufacturing. However, with the growing recognition of the geopolitical environment, some European ESG funds are starting to reverse their positions.
Data from Morningstar reveals that European asset managers increased their holdings in aerospace and defense stocks from 0.7% in 2022 to 1.1% in 2024. ESG funds have also shown a slight increase in their exposure to the sector, rising from 0.4% to 0.5% year-over-year.
This shift has been driven by the recognition that defence stocks are no longer simply a contentious investment but an essential part of ensuring national security. Some asset managers are even looking at defense stocks as an integral part of a diversified portfolio, especially as the EU plans to significantly boost its defense budget in the coming years.
The Future of Defence Investments in Europe
The EU’s increasing focus on military investment suggests that defense stocks will continue to be a key area of growth. As more asset managers revise their policies, companies such as Legal & General and UBS are positioning themselves to benefit from this shift.
At the same time, smaller firms are also reassessing their approach. Mirova, a subsidiary of Natixis, has acknowledged the need to balance ethical concerns with Europe’s growing security demands. The firm’s global head of listed assets, Herve Guez, has stated that rearmament efforts require a nuanced investment strategy.
Conclusion
The landscape for defense investments in Europe is undergoing a significant transformation. Political pressures heightened geopolitical risks, and the EU’s push for increased defense spending is forcing European asset managers to reconsider their long-held policies of excluding the sector.
However defense stocks surged, particularly in aerospace and military equipment companies, and investors are increasingly looking to capitalize on these opportunities. The evolution of ESG standards, alongside the urgency of security concerns, is reshaping the future of defense investments.
