GEFI’s latest Ethical Finance Round Table brought together senior representatives from across the investment and sustainability community to explore how geopolitical instability, technological change, and shifting public policy signals are reshaping ESG investment frameworks. The discussion focused in particular on the evolving role of defence, the rise of dual-use technologies, and the implications for values-based investing.
Opening Perspectives: Data, Definitions and Disruption
The session opened with two perspectives, including an overview of the long-standing data challenges associated with assessing defence exposure. Participants noted that definitions of defence-related activities remain inconsistent across ESG data providers, with differing classifications, thresholds, and treatment of enabling technologies.1 This lack of standardisation continues to create uncertainty for investors, particularly as modern defence systems increasingly include areas such as drones, software, satellites, and AI-enabled capabilities that do not fit neatly into traditional categories
Diverging Perspectives on Defence
Discussion then turned to how investor and client views are evolving. While recent geopolitical developments and strong sector performance have prompted more frequent questions about the absence of defence exposure in portfolios, this has not necessarily translated into a shift in mandates. In many cases, clients are seeking greater transparency and explanation rather than actively requesting inclusion. At the same time, a significant cohort, particularly among faith-based, charitable, and values-led investors, continues to prioritise alignment with underlying principles, even where this may limit returns. As a result, approaches to defence are becoming more differentiated rather than converging.
Fiduciary Duty and Values Alignment
Participants explored the tension between fiduciary duty and values alignment, noting that the role of the asset manager is often not to define what is ethical, but to provide clear frameworks and processes that allow clients to make informed decisions. The 2022 invasion of Ukraine was widely seen as an inflection point, shifting how defence, security, and technology are considered within ESG frameworks and prompting a broader reassessment of the relationship between markets, national security, and long-term stability.
Dual-Use Technologies and the Expanding Boundary of Defence
The increasing importance of dual-use technologies adds a further layer of complexity. Many capabilities, particularly in AI, data, and digital infrastructure, originate in civilian contexts but are subsequently applied in defence settings. This raises difficult questions about where to draw boundaries, especially where revenue exposure may not fully capture the significance of a technology. Participants also noted that controversy data often lags real-world developments, limiting its usefulness in assessing emerging risks.
Applying ESG in Complex Sectors
In practice, investors continue to use a combination of revenue thresholds, exclusions, and engagement to manage defence exposure. However, applying these tools consistently remains challenging. Complex corporate structures, diversified revenue streams, and long-term government contracts can make it difficult to determine the true extent of involvement. While exclusions remain important for signalling alignment with client values, they are often seen as limited in their real-world impact. Engagement offers a route to improve transparency and governance, but its effectiveness is constrained where there is no credible pathway for change.
Governance, Risk and Scrutiny
Governance and reputational considerations were also central to the discussion. Defence-related companies are subject to heightened scrutiny, particularly in relation to conduct, oversight, and corruption risks. Participants noted growing client focus on disclosure quality and decision-making processes, rather than purely binary inclusion or exclusion decisions.
Policy Tailwinds and Market Realities
The broader market and policy context was also highlighted. Approaches to defence exposure vary across ESG and sustainability labelled funds and can limit holdings depending on mandates and objectives. At the same time, UK and European policy signals are increasingly supportive of defence as a strategic sector, linked to economic resilience and sovereign capability.
One participant challenged the extent to which ESG frameworks are meaningfully constraining defence investment at all, noting that capital allocation in the sector is primarily driven by government spending, procurement decisions, and broader market dynamics. This prompted reflection on whether ESG is sometimes overstated as a driver of outcomes in this space.
Conclusion: Differentiation, Not Convergence
Overall, the discussion highlighted that there is no settled consensus on defence within ESG investment. Approaches are becoming more nuanced and more varied, reflecting differing interpretations of risk, responsibility, and values. While greater clarity and consistency in definitions would support investors, the complexity of the issue, especially in relation to technology and geopolitics, means that divergence is likely to persist.
1 MSCI classifies companies based on revenue exposure to conventional and controversial weapons (including cluster munitions, landmines, and biological or chemical weapons) within its ESG screening framework. Sustainalytics and ISS ESG apply similar distinctions between controversial and conventional weapons, but differ in scope, revenue thresholds, and the treatment of military contracting and defence-enabling technologies.