How investors are adapting ESG policies on defence

Pension funds and insurers – as well as GPs – are revising documentation to permit investment into assets that are off limits for many.

Joe Marsh - 22 Sept 2025

https://www.privateequityinternational.com/how-investors-are-adapting-esg-policies-on-defence/

In the face of rising Russian aggression, European investors are making a concerted pivot towards the defence sector, which had been off-limits for many because of ESG policies. Even the most ethically minded allocators, such as Nordic pension funds, are removing restrictions and updating policies around owning aerospace and defence companies, and exploring how best to get exposure to the industry.

Language in limited partner agreements and sustainable investment principles is under widespread review, says Dylan Doran Kennett, a partner at law firm Herbert Smith Freehills Kramer. “Managers are now revisiting LPAs and discussing with their clients whether they can start investing in defence. We’re anticipating a lag before a lot of funding starts coming in.”

GPs are, for example, revisiting ESG frameworks to distinguish between offensive weaponry and defensive or dual-use innovation, says Garvan McCarthy, chief investment officer for EMEA and Asia at consultancy Mercer. Dual-use refers to assets with both civilian and military applications, such as cybersecurity or surveillance tech.

The emphasis has shifted from exclusion to engagement on defence-related assets, McCarthy tells Private Equity International. “However, ethical scrutiny remains high, especially when it comes to end-use, but the framing is evolving.”

Political support is helping boost this momentum. Various state authorities, including the European Commission, have made it clear they see defence investment as aligned with ESG principles, as they seek to encourage private capital to support the sector.

Removing ESG barriers

Since US President Donald Trump returned to office in January, many private banks and multifamily offices in Europe have removed ESG-related barriers to defence investment, says John James, partner and co-founder of BOKA Group. The firm is targeting $300 million for its second defence- focused fund.

A growing number of other asset owners have been easing restrictions, including Danish retirement funds AkademikerPension, PenSam and P FA; and Finnish pension insurance firm Varma. The State Pension Fund of Finland did so as far back as 2022, chief executive Timo Löyttyniemi tells PEI.

Some LPs – such as PenSam, the State Pension Fund of Finland and Varma – are now e xploring options for gaining exposure to the sector via PE and/or venture managers. Certain UK university endowments are likely to allocate to the sector too, an industry source told PEI on condition of anonymity.

New approaches

For GPs looking to raise capital to invest into defence-related assets, it will help to understand investors’ evolving approaches to this area.

Varma updated its Principles for Responsible Investment in June to explicitly include the defence sector under its responsible investment framework. This means any investment in companies operating in this sector must undergo a heightened sustainability assessment, a spokesperson told PEI.

The pension insurer still excludes from its direct investments companies that make controversial weapons and are headquartered outside NATO countries, Switzerland or IP-4 countries (Japan, South Korea, Australia and New Zealand).

Varma’s updated principles apply its entire €64 billion investment portfolio, including the investment process for direct investments, internal investment guidelines and side-letters for new fund commitments, the spokesperson added.

When PenSam updated its own investment policy in May, the main change was to remove several European defence-related companies from its exclusion list, says chief investment officer Claus Jørgensen. It has not made any changes to its US list.

“We had an exclusion list for listed companies involved in what we call controversial weapons,” Jørgensen tells PEI. “That’s mainly related to nuclear and biological or chemical weapons, things like that. We made some changes to the criteria for these exclusions.”

PenSam can now invest in companies such as Airbus or BAE Systems as sub- suppliers to the defence industry, he added. “We have also made a commitment that we will be seeking opportunities to invest in private companies if we can find the relevant managers to do that.”

By contrast, NKr868 billion ($88.2 billion; €74.7 billion) Norwegian pension fund KLP already considered the defence industry and weapons production legitimate sectors for investment, and that position has not changed, says Heidi Finskas, vice-president of sustainability.

“That said, there are clear legal and ethical boundaries – even in times of war,” Finskas tells PEI. “It is essential that companies in this sector operate in accordance with fundamental human rights and humanitarian law.”

KLP excludes defence companies from its portfolios when they are involved in violations of these principles, she says, either due to the nature of the weapons they produce or because they supply arms to regimes or forces complicit in serious breaches of human rights or humanitarian law.

Family offices’ freedom

Family offices, meanwhile, can invest in what they like – being free of political ties or public scrutiny – and family principals are often pro-defence, says Marko Maschek, founder and partner at Marondo Capital. The German private equity firm is raising its second fund to invest in SMEs in the areas of dual-use assets and critical infrastructure.

Summing up the challenge for the likes of pension schemes, Erik Vynckier, who runs his own private investment office, tells PEI: “Old mandates may have blocks that stop you, and once it is in the legal documentation, you are probably trapped living up to those.”

He sees that as a “good reason not to put ESG, DEI or impact language into mandates, as you are going to get trapped investing in overvalued markets and unable to invest in attractive markets”.

That may be a luxury of choice that many institutions do not have.

PEI’s October cover story will be a Deep Dive into the changing landscape around defence-sector investment.