Strengthening defense capabilities in Europe has become a shared priority among policymakers and private institutions. This is driven by escalating geopolitical tensions such as the conflict between Russia and Ukraine, Palestine and Israel and heightened tensions between the US and China over Taiwan (1). As the European Union prioritizes security amid rising global tensions, investment patterns are evolving (2). However, the path to expanding defense investments is far from straightforward. Stringent environmental policies, transparency concerns, and the ethical dilemmas of investing in the defense sector make aligning such investments with environmental, social, and governance (ESG) principles a complex challenge (3).

Defense firms and investors must shift their focus towards ESG integration, as it considers both the industry’s long-term viability and societal responsibility (4). But how can Europe meet its defense needs while ensuring these investments align with ESG frameworks?

Defense growth and the barriers of ESG compliance

Governments are significantly increasing defense spending, creating a booming market that demands both innovation and investment (5). They are therefore also urging institutional investors to increasingly include the defence sector in their portfolio’s (6). Despite surging demand in the defense industry, regulatory and sustainability hurdles complicate investments, and thereby also expansion. As highlighted in a recent episode of Boekestijn en De Wijk, policies such as nitrogen emissions regulations present significant challenges for the Dutch military of defense, delaying particular projects and curbing production growth (7).

While ESG-focused strategies require clear and reliable data, lack of standardized reporting often hinders efforts to align investments with sustainability goals. ESG compliance within the defense industry remains inconsistent, creating barriers for investors who seek to integrate ethical and compliant defense-related assets in their portfolios (8).

As defense companies advocate for public-private partnerships to drive innovation and scale production, they must also enhance transparency and adopt strong governance practices to attract investor confidence. European pension funds are cautiously reassessing their stance on defense investments, particularly in light of the sector’s growing importance to societal stability (9,10). As geopolitical tensions rise, ensuring national security becomes essential for economic resilience, democratic stability, and the protection of critical infrastructure. However, for these investments to be ESG-compliant, defense companies must implement measurable transparency initiatives and governance practices that ensure ethical innovation and compliance. Moreover, there remains significant confusion about what ESG entails in this context. That is, many investors still see green investing and ESG investing as interchangeable concepts, rather than recognizing the broader governance and ethical implications of defense investments (11).

A new ESG framework for the defense industry

A crucial question follows from this all: rather than repurposing ESG frameworks meant for corporate sustainability, does the defense industry require a tailored ESG standard that better captures its unique risks and responsibilities? Unlike conventional ESG criteria, which emphasize environmental impact and corporate sustainability, the defense sector must also account for ethical deployment, dual-use oversight, and conflict prevention, aspects that are currently poorly integrated into mainstream ESG models (12).

In response to this challenge, investors and policymakers have begun shifting towards a more defense-specific approach to ESG, acknowledging that existing frameworks fail to capture the sector’s societal value and governance complexities. For instance, Keen Venture Partners is one of the few firms actively investing in defense startups, which highlight that ESG criteria in its current form create major hurdles. Particularly regarding long-term accountability and ethical use of technology (13). This underscores the need for ESG standards that explicitly address the trade-offs inherent in defense investments, rather than forcing them into frameworks designed for corporate sustainability.

An issue with traditional ESG assessments is their reliance on environmental metrics. While factors such as carbon footprints are crucial in evaluating corporate sustainability, they fail to capture the governance and security-related challenges that define the defense sector. Existing ESG frameworks predominantly classify defense investments under the aerospace industry, neglecting the broader role of modern defense technologies in fields such as cybersecurity, AI, telecommunications, and life sciences (14). This misalignment leaves investors without a clear method to assess the broader societal impact and ethical considerations of these technologies.

Recent developments toward a defense-specific ESG approach

A gradual shift towards an adapted ESG framework for defense is emerging, driven by both institutional investors and government agencies. A recent Dealroom report, The State of Defence Investment 2024 – Resilience Builders in NATO & Europe, highlighted how investors are beginning to recognize the critical role defense technology plays in maintaining societal stability (15). While traditional ESG models often classify defense investments as high-risk or ethically ambiguous, there is growing momentum behind the argument that national security and democratic resilience are fundamental components of a sustainable society.

For example, the European Defence Agency (EDA) has actively started funding technological advancements that integrate ESG principles into military operations, such as renewable energy adoption, cybersecurity innovations, and responsible AI deployment (16). These efforts signal a broader movement towards reshaping ESG criteria to reflect the intersection between security, governance, and sustainability. However, for this shift to become mainstream, clearer policy directives, standardized reporting mechanisms, and better alignment between institutional investors and government stakeholders are needed.

Dual-use technologies as a value adding component

Within this evolving ESG landscape, dual-use technologies offer a tangible solution to further bridge the gap between security investments and ESG commitments. Unlike traditional defense assets, dual-use technologies serve both military and civilian applications, enabling investments that contribute to both national security and broader technological advancements (17). Cybersecurity solutions, AI-driven defense systems, and energy-efficient military infrastructure not only enhance military preparedness but also provide spillover benefits in commercial industries, such as critical infrastructure protection, renewable energy development, and digital safety.

Thus, while dual-use technologies alone do not make the defense industry ESG-compliant under existing standards, they provide an opportunity to enhance its sustainability profile within an adapted framework. By embedding ethical innovation, governance oversight, and responsible deployment criteria into investment guidelines, defense firms can demonstrate greater alignment with the core principles of ESG while maintaining operational effectiveness.

The path forward: balancing security and sustainability

To reconcile the need for defense investments with ESG principles, European policymakers, investors, and defense companies must collaborate to establish clear guidelines and accountability measures. A crucial aspect of this process involves strengthening trade controls and enforcement mechanisms to prevent restricted dual-use technologies from reaching adversarial nations (18). Governments require a more comprehensive regulatory framework to monitor and restrict sensitive technology exports, ensuring they are not misused for military or human rights violations.

Furthermore, it is essential for Allied governments to assess risks related to technology leaks, targeted investments by competitor nations, and industrial espionage. Given that dual-use technologies often have both military and civilian applications, establishing forward-looking criteria to evaluate the security implications of such innovations is imperative. Collaboration between governments, the military, universities, and private sector stakeholders will be essential in shaping policies that align security priorities with ESG compliance (19).

To reconcile defense investments with ESG, a structured approach is needed - one that prioritizes transparency, robust risk assessment, and innovation that serves both security and sustainability (20). Key recommendations include developing standardized ESG criteria for defense and dual-use technologies, ensuring transparency and promoting responsible innovation. Mandatory transparency and impact reporting, as well as prioritizing dual-use technologies that align military objectives with civilian sustainability goals, can bridge the gap between defense needs and ESG commitments. Stronger public-private partnerships can drive ESG integration by fostering innovation, mitigating financial risks, and ensuring greater accountability in defense investments.

By addressing these challenges head-on and developing industry-specific ESG frameworks, Europe can create a balance where defense investments not only bolster security but also align with the values of sustainability and ethical governance. In doing so, the EU can lead the way in redefining responsible investing for a more secure and sustainable future. Shall we?

This article is part of The Outside World, ftrprf’s very own research center.

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Sources:

1. European Central Bank. 2024. Financial Stability Review, May 2024. European Central Bank. https://www.ecb.europa.eu/press/financial-stability-publications/fsr/special/html/ecb.fsrart202405_01~4e4e30f01f.en.html.
2. PwC Strategy&. 2024. The Evolving Role of ESG in the Defense Industry. PwC. Accessed January 28, 2025. https://www.strategyand.pwc.com/de/en/industries/aerospace-defense/evolving-role-esg-in-defense-industry.html.
3. Baker, Russel. 2024. “ESG Firmly in Defence Sector’s Sights." Investment Magazine, January 30, 2024. https://www.investmentmagazine.com.au/2024/01/esg-firmly-in-defence-sectors-sights/.
4. PwC Strategy&. 2024. The Evolving Role of ESG in the Defense Industry. PwC. Accessed January 28, 2025. https://www.strategyand.pwc.com/de/en/industries/aerospace-defense/evolving-role-esg-in-defense-industry.html.
5. Ibid.
6. Bresson, Marceline and Gerben van der Marel. 2024. "Pensioen: Duurzaam Beleggen Makkelijker Gezegd dan Gedaan." Het Financieele Dagblad, December 23, 2024. https://fd.nl/bedrijfsleven/1540986/pensioen-duurzaam-beleggen-makkelijker-gezegd-dan-gedaan
7. Boekestijn, Arend Jan, and Rob de Wijk. 2024. “Groeipijn bij de krijgsmacht.” BNR, January 11, 2025. https://www.bnr.nl/podcast/boekestijn-en-de-wijk/10564712/groeipijn-bij-de-krijgsmacht.
8. PwC Strategy&. 2024. The Evolving Role of ESG in the Defense Industry. PwC. Accessed January 28, 2025. https://www.strategyand.pwc.com/de/en/industries/aerospace-defense/evolving-role-esg-in-defense-industry.html.
9. Bresson, Marceline and Gerben van der Marel. 2024. "Pensioen: Duurzaam Beleggen Makkelijker Gezegd dan Gedaan." Het Financieele Dagblad, December 23, 2024. https://fd.nl/bedrijfsleven/1540986/pensioen-duurzaam-beleggen-makkelijker-gezegd-dan-gedaan
10. Schwartz, Koos. 2025. “Defensiebedrijven hebben hulp van de overheid nodig.” Trouw, January 16, 2025. https://www.trouw.nl/duurzaamheid-economie/defensiebedrijven-hebben-hulp-van-de-overheid-nodig~b054827f/.
11. Winterberg, Susan, and Johannes Lenhard. 2024. ESG for Dual-Use Technology. VentureESG, January 2024. https://www.ventureesg.com/wp-content/uploads/2024/05/VentureESG_ESG-for-Dual-Use-Technology-05.pdf.
12. Winterberg, Susan, and Johannes Lenhard. 2024. ESG for Dual-Use Technology. VentureESG, January 2024. https://www.ventureesg.com/wp-content/uploads/2024/05/VentureESG_ESG-for-Dual-Use-Technology-05.pdf.
13. Schwartz, Koos. 2025. “Defensiebedrijven hebben hulp van de overheid nodig.” Trouw, January 16, 2025. https://www.trouw.nl/duurzaamheid-economie/defensiebedrijven-hebben-hulp-van-de-overheid-nodig~b054827f/.
14. Winterberg, Susan, and Johannes Lenhard. 2024. ESG for Dual-Use Technology. VentureESG, January 2024. https://www.ventureesg.com/wp-content/uploads/2024/05/VentureESG_ESG-for-Dual-Use-Technology-05.pdf.
15. Dealroom. 2024. The State of Defence Investment 2024: Resilience Builders in NATO & Europe. Dealroom, September 26, 2024. https://dealroom.co/reports/the-state-of-defence-investment-2024-resilience-builders-in-nato-europe.
16. European Defence Agency. 2024. “Green Fingers: EU Defence Energy Community Ends Phase with New Proposals.” European Defence Agency, April 25, 2024. https://eda.europa.eu/news-and-events/news/2024/04/25/green-fingers-eu-defence-energy-community-ends-phase-with-new-proposal.
17. NATO Parliamentary Assembly. 2024. Critical Dual-Use Technologies: Baldwin Report. NATO, December 2024. https://www.nato-pa.int/download-file?filename=/sites/default/files/2024-12/051%20ESC%2024%20E%20rev.2%20fin%20-%20CRITICAL%20DUAL-USE%20TECHNOLOGIES%20-%20BALDWIN%20REPORT.pdf.
18. Ibid.
19. Ibid.
20. PwC Strategy&. 2024. The Evolving Role of ESG in the Defense Industry. PwC. Accessed January 28, 2025. https://www.strategyand.pwc.com/de/en/industries/aerospace-defense/evolving-role-esg-in-defense-industry.html.