As Germany and the EU hike defence spending, at the Natixis Investment Managers Thought Leadership Summit 2025, investment managers discussed the relation between defence stocks and ESG-focused portfolios and how they can sit together. 

Paris-based Natixis Investment Managers and its affiliates, which have about €1316.9 billion ($1.363.7 billion) assets under management, hosted a Thought Leadership Summit 2025 in Paris last week. It concluded that – with certain caveats – defence stocks can sit in ESG-focused portfolios.

The decision came after the EU announced plans this month to unlock nearly €800 billion ($873 billion) to bolster security as the US suspended military aid to Ukraine and turned up pressure on the Ukrainian government to reach a peace deal. This has given rise to a big shift in the investment landscape. 

The EU's “Rearm Europe” package involves the activation of the national safeguard clause of the Stability and Growth Pact, enabling EU countries to increase their defence spending by an average of 1.5 per cent of GDP, or €650 billion that could be released over the next four years. It also entails a "new instrument" to provide €150 billion in loans to member states to finance joint defence investments in pan-European capabilities.

Berlin also proposed to exempt defence from a budget restriction; it will launch an off-budget infrastructure fund of €500 billion over the next 10 years. The money can be used for civil and population protection, transport, energy, education, care and science infrastructure, in addition to hospital investments, research, and digitisation. Other European nations and UK Prime Minister Keir Starmer are taking similar action.

Defence and security are underrepresented in many portfolios and have faced decades of underinvestment in Europe.

Mathilde Dufour, head of research at Mirova, a subsidiary of Natixis IM focused on sustainable investing, stressed the importance of both defence and ESG-focused investments. “They are not contradictory,” she told this news service. “Sustainable finance has to be used to finance what is useful for society,” she said. “It’s about investing in all areas. We have to invest in security.” 

Her views were echoed at the event by Lea Dunand-Chatellet, portfolio manager and head of responsible investing at DNCA Finance, a Paris-based asset manager and an affiliate of Natixis IM. “Defence is the real elephant in the room but ESG can apply to all sectors. Defence has never been a real issue for us,” she added. Ossiam, an asset manager, also believes that defence can be part of a sustainable debate. “It’s important to have this debate with clients as some clients will refrain from investing in the defence industry.”

However, Dufour emphasised the need to clarify rules on what types of weapons should be considered controversial and which ones should be excluded from ESG-focused investments. “We do not hold defence stocks in our portfolios as we need clearer rules on ESG and defence investing. We only have funds covered by Article 9 under the EU’s Sustainable Finance Disclosure Regulation (SFDR),” she said.

Mirova has a range of ESG-focused funds covered by Article 9, including ecosystem conservation, biodiversity and sustainable agriculture, with investments ranging from precision agriculture, regenerative agriculture and technologies to reduce emissions from the sector.                                                  

By contrast, Dunand-Chatellet does hold some defence stocks which she said can come under Article 8 of the SFDR.  

Jon Cunliffe, JM Finn head of investment office, also emphasised recently how ESG investing has, wrongly in his view, become heavily politicised in recent years. In the long term, he sees no reason why investing in higher-than-average ESG scoring equities within each sector should not deliver returns in line or better than the broad market. It flags the fact that ESG integration adds value to mitigating risk. "There is no reason why defence stocks can’t sit within this framework," Cunliffe said.

At the Paris summit, Dufour also stressed that ESG investing is a long-term trend. There is still a lot of demand for ESG-focused funds, despite the recent challenges. “We are seeing some clients pull money out from US investment managers where there is not enough focus on ESG. Big investors are wanting more ESG-focused funds,” she said.

ESG-focused investment has been growing in Europe, but it has been fading slightly in the US.

This news service is assessing the rise in defence spending and the relationship between defence stocks and ESG-focused portfolios and where they sit together. In 2022, a few months after Russia's invasion of Ukraine, we wrote about how the boundaries of ESG are being shifted by countries needing to equip for their defence.