Investment committees pondering whether to include or exclude defence investments should pay attention to weapons companies’ anti-corruption policies and whether robust internal audits are in place, according to Morningstar Sustainalytics.
Asset owners should also think about the safety and quality of investee companies’ armaments and other products.
Tatiana Vediakova, senior ESG analyst for aerospace & defence at Morningstar Sustainalytics, said the industry was generally seen as high risk from an ESG perspective, with business ethics one of the key risk areas.
“Strong internal audits and monitoring systems are essential as companies need to detect problems before they become public scandals,” she said during a webinar.
She also noted that defence was a primary target for cyberattacks, and that AI-powered drones and other systems introduced new cybersecurity challenges.
‘Structural misalignment’
According to the European institutional investor network Shareholders for Change (SfC), the defence industry presents “systemic and multifaceted risks” from a sustainability perspective.
“Arms exports to authoritarian regimes, involvement in weapons of mass destruction, lack of transparency, and poor human rights due diligence are not isolated issues,” it said in a report last month.
“Rather, they are indicative of a structural misalignment with the principles of sustainable and responsible investment. For financial market participants — particularly those with fiduciary duties — such risks cannot be ignored or externalised.”
Tommy Piemonte, engagement manager at Pax-Bank für Kirche und Caritas in Germany, has been pushing back against a drive to frame defence investment as sustainable investment.
In its report last month, SfC said it recognised that “national defence capabilities remain a necessity in today’s world” but that this did not equate to an endorsement of the arms industry as a “sustainable” sector.
It outlined how its members are approaching sustainability challenges linked to the arms sector through “critical shareholding”, public positioning and collaborative advocacy, saying that the challenges were too complex for simple exclusion policies or “isolated interventions”.
Division to remain
According to Morningstar, sustainable finance regulations in the EU do not categorically exclude investing in defence companies as long as they adhere to principles of good governance and “do no significant harm”.
It has said that investors are adapting to new geopolitical and investment realities by using granular ESG data to distinguish between controversial weapons, which are often excluded outright, and conventional defence activities, which are now seen by some as protectors of democratic values.
The firm pointed to an increasingly pragmatic investor response to global events like the war in Ukraine, which have reshaped views on national security and portfolio resilience.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said: “Investors will remain divided on whether defence is compatible with a sustainability objective, especially those focused on positive impact, and will continue to be underweight in the defence industry.”
The firm has found that 43% of ESG European equity funds now have some defence exposure, while the Morningstar European aerospace and defence index gained 166% between January 2022 and March 2025.
The latest digital edition of IPE’s magazine is now available
