Dominik Buholzer: «When Green Meets Camouflage – Is ESG Shifting Gears?»
The ESG honeymoon is long over. But as defense spending moves into the spotlight, it could give the sustainability label a surprising new relevance. finews.com Editor-in-Chief Dominik Buholzer takes a closer look.
Last Thursday, in La Défense, Paris’ sprawling financial district, France’s Minister of Economy and Finance, Eric Lombard, made a bold pitch: ramp up defense spending and drop the taboo around investing in the sector.
At the same time, Mathilde Dufour, Head of Sustainability Research at Mirova, an affiliate at Natixis Investment Managers, stated: «We need to seriously consider whether the defense sector should also fall under ESG.»
ESG Meets the Military
Until recently, these two realms have been treated as fundamentally incompatible. Military investments carried the stigma of being inherently «socially harmful.»
But what was once deemed unthinkable is quickly becoming a real possibility.
Geopolitics And Fiscal Flexibility
Driving this shift is the war in Ukraine and mounting U.S. pressure on European allies to take greater responsibility for their security. That means spending more and taking on more debt. Germany, for instance, has suspended its constitutional debt brake. The EU, too, is eager to play a central role in rearmament, even though defense remains a national responsibility.
This push requires substantial capital, and private markets are expected to step up. Meanwhile, ESG itself is undergoing a credibility crisis.
The ESG Narrative is Losing Steam
For years, ESG dominated the agenda across industries, especially in financial services. It was hailed as the next big thing. But the enthusiasm has faded.
Despite billions channeled into ESG-branded funds, the actual impact on corporate behavior remains murky at best. ESG ratings often contradict each other, confusing investors rather than guiding them.
There are also inherent trade-offs between the E, S, and G pillars. A company may excel in social practices – say, as a model employer – while still emitting high levels of CO₂.
Mounting Complexity And Regulation
The regulatory burden is also becoming overwhelming, particularly for small and mid-sized enterprises. ESG reporting and due diligence requirements are increasingly difficult to manage.
And the financial industry itself has not always played fair. Glitzy sustainability reports often bear little resemblance to a company’s real-world actions. Funds marketed as «green» may hold assets that are anything but. The term «greenwashing» has become part of the mainstream ESG vocabulary.
The Last Taboo?
Amid this backdrop, defense has remained one of the few red lines in ESG investing.
But that boundary is blurring. «We shouldn’t shy away from this debate. The issue deserves to be on the table,» says Laura Kaliszewski, Head of Client Sustainable Investing at Natixis Investment Managers. She stresses the need to finance what is beneficial for clients and society. However, «reputational fears are a real concern for clients when it comes to Defense investing».
To mobilize private capital towards this sector in a way that is compatible with ESG considerations, «we will need clear rules, definitions and guardrails, there is still important work to do with governments, regulators and within the whole industry,» says Kaliszewski.
Investor sentiment is shifting. The defense sector, once the pariah of the stock market, is increasingly seen as a new growth story. Dual-use technologies—military innovations with civilian applications—are particularly attractive from a return perspective.
New Sales Narrative
Putting an ESG label on a defense fund could significantly boost its marketability, especially in an environment where even traditionally pacifist parties like the Greens have warmed to the idea of supporting the military and supplying weapons to Ukraine.
For the defense industry, the ESG seal of approval would be transformative. Major arms manufacturers and their suppliers still struggle to secure financing from banks. With ESG credentials, that could change virtually overnight.
Between Credibility And Pragmatism
Whether this shift enhances or undermines the credibility of the ESG movement is another question entirely.
It’s a dilemma now facing not only defense companies and regulators, but also investors who must weigh returns against principles in an increasingly complex world.
Dominik Buholzer is CEO und Editor-in-Chief of finews.ch and finews.com
