Defence firms tap into ESG investment wave amid global rearmament

Global military spending climbed to a record $2.887 trillion last year, with Europe recording the sharpest increase in defence investments worldwide. At the same time, so-called “sustainable” investments flowing into the arms industry have also surged — a trend critics say is being driven by increasingly diluted environmental and ethical standards for Europe’s defence sector.

Three main actors are driving this shift, according to an analysis published by the Toda Peace Institute: the defence industry itself, the European Commission and the financial sector.

Research by Voxeurop, cited in the article, estimated that investments classified as “sustainable” in the defence industry surpassed €50 billion in 2025. Traditionally, sustainable investment criteria — often linked to environmental, social and governance (ESG) standards — excluded sectors such as weapons manufacturing or coal because of ethical and environmental concerns. But analysts say those boundaries are increasingly being relaxed for Europe’s defence industry.

Major arms manufacturers have spent years trying to position themselves as environmentally and socially responsible businesses.

Rheinmetall, Germany’s largest defence company, states on its website that sustainability is “an integral part” of its corporate strategy and says it aims to achieve carbon neutrality by 2035.

Meanwhile, MBDA, Europe’s biggest missile and drone manufacturer, says it supports “people and the planet” through responsible business practices and has established its own ESG committee.

Rolls-Royce, another major defence-sector supplier, announced a “Pathway to Net Zero” initiative in 2021 aimed at reaching carbon neutrality by 2050.

EU backing and peaking interest by financial markets

The article argues that the European Commission has also played a major role in opening the defence sector to sustainable financing.

In October 2023, the Commission stated in the EU Official Journal that strategic sectors — especially the defence industry — must have access to both public and private financing because of their contribution to European security.

Financial markets have shown growing enthusiasm for the sector as well, with defence stocks delivering exceptional returns in recent years.

Although share prices dipped slightly following the outbreak of war involving Iran, several major European defence firms have massively outperformed broader markets since 2022.

According to the report, Rheinmetall and Rolls-Royce have each seen stock price gains exceeding 1,000% since 2022, while most of Europe’s top defence firms have significantly outpaced the EURO STOXX 50 benchmark index.

Voxeurop’s research found that most sustainable investment capital entering the arms industry is flowing toward large established corporations, though startups are increasingly benefiting as well.

The profitability of the sector has also encouraged companies outside the traditional defence industry to move into military production. While Volkswagen is reportedly considering producing the Iron Dome system at a factory in Osnabrück, France's Renault has already begun manufacturing military drones.

As cited by the Toda Peace Institute's analysis, critics argue that the defence industry’s growing acceptance within sustainable finance frameworks represents a major case of “greenwashing” — the practice of portraying controversial industries as environmentally or socially responsible. The article argues that sectors once considered ethically problematic are now increasingly being rebranded as compatible with ESG investment principles because of Europe’s changing security priorities and booming defence spending.

By Nazrin Sadigova