Do Institutional Investors Increasingly View Defense Ethically Acceptable?

Attending an event in Luxembourg in June 2025, I was struck by how many institutional investors in the room had holdings in defense stocks. In a straw poll, more than half of the 50 or so delegates said they did⁴. That’s a far higher number than would have been the case a short time ago.

Just over two years back, when we launched the VanEck Defense UCITS ETF in March 2023, the initial buyers were mostly retail investors. Since then, though, the ETF has grown to $7.9 billion in net assets⁵ and counts insurance companies, pension funds and wealth managers among its investors.

As Europe’s original and biggest dedicated defense exchange traded fund⁶, our ETF might be considered a good bellwether of institutional investors’ shifting mindset. Many investors who once avoided the sector for ethical or reputational reasons are now reassessing its role in ensuring national and collective security. At the same time, others remain cautious, arguing that the social and humanitarian implications of weapons manufacturing are difficult to reconcile with responsible investment principles. For them, reputational risk, stakeholder expectations, and alignment with long-term sustainability goals remain decisive considerations. This divergence highlights an ongoing debate rather than a settled consensus, even as capital flows into the sector continue to rise.

Contributing to Peace Amid Mounting Instability

In a sign of the changing times, the European Commission emphasizes that investing in defense companies should not be thought unethical or unsustainable. Following the announcement of its ReArm Europe Plan aiming to raise €800bn for defense spending by 2030, a European Commission notice stated that “the EU’s defence industry has the potential to contribute to our common peace and security, in line with UN Sustainable Development Goal 16 – Peace, justice and strong institutions”⁷.

Sadly, the Global Peace Index shows why defense is so topical. Global stability has declined over the past 17 years (see chart). The index registers significant increases in political stability, the number and intensity of conflicts, deaths from conflict and increasing geopolitical fragmentation.

GPI Overall Trend and Year-on-year Percentage Change, 2008-2025

Peacefulness has declined year-on-year for 14 of the last 17 years.

Source: IEP, June 2025.

Against that backdrop, military spending is currently growing quickly. Globally, spending rose by 9.4% in 2024 to $2.7 trillion, the sharpest rise since at least 1988, according to the respected Stockholm International Peace Research Institute⁸. It is worth remembering that if current geopolitical situation changes, government might reevaluate their defense spending targets downwards.

Rethinking Defense and Sustainability

Even funds with specific sustainable mandates are rethinking their approach to defense. In 2024, about a third of funds in Europe and the UK focused on environmental, social and governance issues had €7.7bn invested in the sector, compared with €3.2bn in the first quarter of 2022, according to an analysis for the Financial Times by Morningstar Direct⁹.

Typically, though, they make a critical distinction between controversial and conventional weapons. They still widely exclude makers of controversial weapons – including nuclear, chemical and biological arms, land mines and cluster munitions – that are banned under international treaties. However, they are investing more in makers of conventional weapons such as tanks, firearms and aircraft.

Yet there remains some confusion over to what extent defense stocks can be thought sustainable under the EU’s Sustainable Finance Disclosure Regulation (SFDR). This regulation is currently being reviewed and further clarification is due either later in 2025 or early 2026.

A Nuanced Perspective

Our ETF’s approach is to specifically exclude controversial weapons. It’s defined as an Article 6 fund under SFDR and not marketed as a sustainable or green fund. One important clarification in this discussion is the distinction between ESG integration and ethical investing. ESG integration is about assessing and managing environmental, social, and governance risks across all industries, rather than making moral or ethical judgments. Exclusions are often a matter of regulation or investor policy, rather than proof that a company or sector is inherently incompatible with ESG principles. This distinction has often been overlooked, leading to a somewhat binary view of defense: either fully excluded or fully embraced. In reality, the picture is far more complex.

Although the debate has shifted since the ETF’s 2023 launch, our view is that defense funds should not be marketed specifically as sustainable investments. Nevertheless, as investors and policymakers increasingly recognize that national and collective security are prerequisites for long-term sustainability, perspectives are evolving. This does not mean that defense activities are sustainable in themselves. This recognition does not resolve the ethical tension inherent in the sector, as weapons are ultimately designed to cause harm, but it does help frame defense within a broader context of risk management and resilience.

There’s no doubt that attitudes to defense investing have changed significantly and continue to do so. Investors of all types are welcoming the sector back into the mainstream, viewing it as essential for protecting the peace and focusing on its investment merits. At the same time, the topic remains sensitive: some stakeholders continue to question whether defense production can align with ESG principles, particularly those emphasizing social impact and human rights. In this sense, the integration of defense within ESG-aware portfolios may increasingly reflect a pragmatic understanding of global realities rather than a moral endorsement, signalling that investor support for the sector is likely to continue growing but debate about its ethical and sustainability implications is set to continue as well.