Rethinking Defense Exposure in Sustainable Funds
As global defense spending escalates, investors committed to sustainable strategies are reconsidering their exposure to the defense sector.1 However, many sustainable funds already invest in companies engaged in defense-related activities, including Sustainable Finance Disclosure Regulation (SFDR) Article 8 and 9 funds.2 Our analysis found that 77% of Article 8 funds and 66% of Article 9 funds have some exposure to either controversial or conventional weapons, with average exposures of 3.7% and 3.3%, respectively.3 This compares to 6.9% and 10.2% for the MSCI ACWI and MSCI Europe Indexes, respectively, as of May 31, 2025.
Defense exposure in Article 8 and 9 funds relates primarily to conventional military weapons, as nearly 90% of these funds explicitly exclude controversial weapons such as anti-personnel landmines. Applying MSCI’s broadest screening criteria specifically for conventional weapons found allocations up to 36% in Article 8 funds and 15% in Article 9 funds, as of May 31, 2025 — potentially aligning with broader sustainability goals and investor risk-return preferences.4
Data as of May 31, 2025. Analysis based on Article 8 and 9 funds, as defined by the SFDR, within MSCI’s coverage universe. Based on funds with an exposure greater than zero. Source: MSCI ESG Research
A Battle on Two Fronts: Rearming and Tariffs
Amid surging defense investments and looming tariffs, investors face complex challenges. Navigating the intricate and global supply chain of the aerospace and defense industry becomes crucial to assessing company preparedness for disruptions.
Aerospace, Defense and Tariff Turbulence
Tariffs and tangled supply chains: This week, we explore how commercial aerospace and defense companies are navigating a new wave of trade restrictions. From Boeing to Lockheed Martin, what do transparency and oversight mean when the stakes — and the sky —are high?
Mapped or Missed? Navigating Tariff Uncertainty
Traceable supply chains can offer clarity amid trade-policy volatility, aiding businesses in forecasting costs, navigating tariffs and reducing investor risk.
1 Yusuf Khan, “Sustainability Investors Eye Defense Stocks as Geopolitical Tensions Rise,” The Wall Street Journal, April 21, 2025.
2 Under the EU’s SFDR, Article 8 funds promote, among other characteristics, environmental or social characteristics, while Article 9 funds must have sustainable investment as their objective. They do not explicitly mention conventional defense investments but when pursuing sustainable investments, controversial weapons — a Principal Adverse Impact indicator — are excluded.
3 The percentage of a fund’s market value exposed to companies that manufacture bio/chem weapon components, bio/chem weapon systems, blinding laser weapons, cluster munitions, cluster munition components, cluster munition delivery platforms, depleted uranium, white phosphorous weapons, landmines, landmine components, weapons that utilize non-detectable fragments, nuclear weapon systems, nuclear weapon components, nuclear weapons support services, conventional weapon systems, conventional weapon components and conventional weapon support services. This also includes companies that have a >20% or <50% ownership stake in manufacturers of the above categories (companies that own >50% of an involved company are treated as if they are primarily involved). Controversial weapons are typically those that cause indiscriminate or inhumane harm.
4 The percentage of a fund’s market value exposed to companies flagged for involvement in conventional weapons according to MSCI’s highly restrictive screen. This includes all manufacturers of conventional weapons systems and components as well as companies providing supplies and services if the revenue is =>5%.
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