Responsible investors to develop rules for investing in defence

Institutional investors have kicked off a project to establish a set of principles for responsible defence investment.

Schroders, LBP Asset Management and Skandia are among those behind a concept note published on Thursday, identifying “the urgent need for a set of global principles to help investors navigate the challenges of investing in defence-related companies”.

The document proposes a process and structure for the development and implementation of such principles.

“Defence-related investment has been an emergent topic over the last two years, tied to increased conflict risk, increased defence spending in Europe and increasingly blurry lines between defence and tech companies,” said Dan Neale, head of social issues for the Church Commissioners for England and one of the architects of the new principles.

While many responsible investors, including European pension funds, have long excluded the arms industry – in part or completely – from their portfolios, there are widespread calls for this to be rethought in light of the current geopolitical landscape.

Rethink at pension funds

Earlier this week, Sweden’s KPA Pension said that, after “careful consideration”, it would lift a self-imposed ban on defence investing next year, citing the need to contribute to the societal need for protection during potential conflicts in Europe.

It will retain its exclusion of so-called ‘controversial weapons’ like nuclear weapons and cluster munitions.

Figures from Insurance and Pension Denmark (IPD) show the country’s pensions industry doubled its exposure to defence investments between 2023 and 2024, with PFA recently announcing that its allocations to the sector have risen by almost 1000% after a change in internal policy.

Norway’s parliament voted this week to suspend the body that advises Norges Bank Investment Management (NBIM) on its exclusions, in a move widely understood to be driven by disagreement over how it approaches conflict and arms.

The country’s Council of Ethics will be put on hold while its rules are rewritten, after it told NBIM to divest from a number of companies with alleged links to Israel’s war in Gaza.

“Whether investors want to exclude all of defence, or whether they’re in an index fund which only excludes controversial weapons, responsible investment principles still need to apply”

Dan Neale, head of social issues for the Church Commissioners for England

In August, the advice resulted in the sovereign wealth fund axing Caterpillar from its portfolio.

The decision garnered criticism from US republicans, including threats of punitive tariffs against Norway.

“We expect to receive a letter from the Ministry of Finance with further information on how this will be handled going forward,” a spokesperson for NBIM told IPE, declining to comment further.

More clarity is needed

“The responsible investment community has historically relied on revenue screens to screen out certain groups of companies, but screening out weapons companies doesn’t stop you from being connected to conflict,” Church Commissioners’ Neale told IPE.

“Especially if you have exposure to tech companies.”

The growth of ‘dual use’ technologies – those that can be used for both military and non-military purposes – has created more complexity within investment portfolios about what is classed as a defence-related business activity.

The chemicals industry also faces issues around ‘dual use’ products.

“Whether investors want to exclude all of defence, or whether they’re in an index fund which only excludes controversial weapons, responsible investment principles still need to apply,” said Neale.

The group developing the principles includes subject matter experts, such as specialists from the Geneva Academy on International Humanitarian Law and Human Rights Law, and the EIRIS Conflict Risk Network.

A number of unnamed institutional investors are also involved.

The group expects to start writing the first set of draft principles early next year.

“We are also thinking about how best to operationalise these – whether through a formal initiative or just toolkits,” said Neale. “And will be consulting on all of this.”

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