Sustainable or responsible investing has experienced huge growth over the past decade. This investment approach is anchored in environmental, social and governance principles and is known as ESG. This set of standards is designed to ensure that funds are directed toward companies that protect the environment, have a positive impact on people through things such as labour standards, and operate ethically, transparently and with accountability.
Author
- Chau Le
Senior Lecturer in Banking and Finance, University of Lincoln
Global ESG assets are predicted to hit US$40 trillion (£30 trillion) by 2030. Yet, despite the rise, inconsistencies in standards and data across ESG providers make responsible investing far more complex than it should be.
The world today faces compounding crises - climate change, geopolitical instability and what economists call "macroeconomic fragmentation". This refers to the breaking apart of global economic cooperation: countries are turning inward, imposing tariffs, pursuing divergent monetary policies, and allowing political tensions to impede cooperation on shared challenges.
The traditional boundaries of ESG are now being tested - and difficult questions emerge. Should ESG funds continue to exclude arms and defence firms? Or perhaps it is time to reconsider what sustainability really means in today's volatile world.
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For decades, defence companies were lumped into the same category as tobacco firms or fossil fuel giants - excluded from ESG portfolios for being damaging to society or incompatible with peace. For example, an EU report in early 2022 recommended that investments in weapons be formally classified as "socially harmful" and therefore excluded from funds marketed as ethical.
But since the full-scale Russian invasion of Ukraine in 2022, public sentiment - and investor perception - has begun to shift. Security is being reframed as a prerequisite for sustainability. Without peace and stability, there can be no climate action.
Several countries have already begun adapting their policies. Germany, for instance, has reclassified defence as part of its national sustainability strategy.
SEB, one of the Sweden's largest banks, had long prohibited its funds from investing in the arms industry. But after the war in Ukraine, it reversed this policy to allow selective investments in the defence sector. The bank cited a changing geopolitical landscape for its decision.
And more recently, the European Commission's ReArm Europe plan was released in March 2025. This aims to mobilise €800 billion (£697 billion) in defence investments over the next four years.
These changes raise a critical question: can defence spending now be seen as part of a responsible investment strategy?
A world of grey zones
Despite the growing push to integrate defence into the ESG framework, the EU has yet to formally clarify whether such investments are consistent with its sustainable finance criteria. Without guidance, businesses and financial institutions face a confusing and often contradictory landscape.
As sustainable investing becomes more mainstream, it's increasingly vulnerable to greenwashing, political pressures and competing ethical values. What qualifies as "ethical" in one country may be unacceptable in another.
For example, large-scale hydroelectric projects in southeast Asia may satisfy the "E" (environmental) component of ESG by producing low-carbon energy. But they can also lead to the displacement of Indigenous communities - undermining the "S" (social) element.
Individual investors appear to be increasingly interested in making their money matter. But many remain unaware of how ESG funds are constructed - or what they may include. The presence or exclusion of defence companies is rarely disclosed clearly in fund documentation. This lack of transparency makes it difficult to align investments with personal ethics.
To make more informed choices, investors should demand clearer reporting, especially regarding dual-use technologies. This is tech that can be used for both civilian and military purposes and controversial sectors such as nuclear energy and surveillance technologies.
Investors could consider asking whether the fund explicitly discloses its position on defence, arms or dual-use technologies, as well as how it balances short-term geopolitical realities with long-term environmental sustainability. Fundamentally, they should consider whether what they know of the fund's ethical stance aligns with their own values.
In an age of accelerating climate risks and geopolitical fragmentation, the ESG landscape is far from black and white. The inclusion of arms and defence in "ethical" or "responsible" investing may seem paradoxical, but it reflects a deeper shift.
These days, security and sustainability are increasingly intertwined. The real challenge is not just how we invest - but how we define the good we aim to achieve. As the world grows more complex, so too must the frameworks for responsible finance.
Chau Le does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
