ESG and defence became a sensitive topic in late 2025, when the European Union introduced an important clarification in how its sustainable finance framework applies to the defence sector.
With the publication of Commission Notice C/2025/4950 and Commission Delegated Regulation (EU) 2025/1775, the European Commission addressed a long-standing and contentious question: when defence-related activities are automatically incompatible with ESG criteria—and when they are not.
From “controversial” to “prohibited” weapons
The core change lies in definitions. Until now, the EU’s sustainable finance framework relied on the concept of “controversial weapons”. This term was broad, legally vague, and interpreted differently by fund managers, index providers, and ESG rating agencies.
The new texts narrow this definition. Automatic exclusion now applies only to “prohibited weapons” those whose development, production, or use is explicitly banned under international conventions to which EU Member States are parties.
In practice, this includes anti-personnel landmines, cluster munitions, chemical weapons, and biological weapons. Nothing beyond that list. Weapons and activities outside these categories are no longer automatically excluded from sustainable benchmarks.
The Delegated Regulation will apply from 30 June 2026, with a transitional period for existing climate and Paris-aligned benchmarks.
What this means in practice
The change applies specifically to climate and Paris-aligned benchmarks, not to ESG funds as a whole. It does not create an obligation to invest in defence. Rather, it removes automatic exclusions where international law does not require them.
For investors, this brings greater regulatory clarity. For parts of the defence sector, it represents an exit from the so-called “grey zone”, where companies engaged in legitimate—and often dual-use—activities were treated as ESG-incompatible by default.
It is also important to clarify the role of Article 8 and Article 9 funds under SFDR. The Commission Notice is interpretative in nature. It does not require funds to include defence companies. It simply states that the defence sector, in itself, does not automatically render an investment unsustainable. Final decisions remain with fund policies and risk management frameworks.
ESG and defence in the context of EU security
In its official documents, the Commission places this clarification within the broader context of EU security and resilience. Since 2022 and the war in Ukraine, defence capacity has increasingly been viewed as part of Europe’s strategic resilience.
This is a geopolitical choice. Not a shift in values, but an adaptation to an environment in which security can no longer be taken for granted.
Arguments in favour
From a regulatory perspective, the change introduces clearer and more predictable rules. It aligns the ESG framework more closely with formal definitions in international law and reduces the risk of overly conservative interpretations driven by fear of non-compliance.
For markets, this allows more accurate risk pricing and lowers administrative barriers for activities that are not prohibited but were previously treated as such.
Real risks and criticism
Criticism remains strong. The most frequently cited concern is the potential dilution of the ethical meaning many investors associate with ESG. For part of the market, the change appears as a political recalibration of sustainability in light of current strategic priorities.
There is also a risk of losing trust among investors who view ESG primarily as a moral framework rather than as a tool for managing risk and capital allocation.
Beyond the regulatory debate lies a deeper issue. The defence industry is among the most resource-intensive and polluting sectors. This places inherent limits on any framework that seeks to be ethical, sustainable, and geopolitically functional at the same time.
What comes next
The late-2025 changes do not close the debate. The framework now rests more firmly on legal definitions. Instead of automatic exclusions, it places greater responsibility on investors and governance structures.
On one side stand sustainability and ethics. On the other, security in a world shaped by war and geopolitical risk. When security becomes a strategic priority, the boundaries of sustainable finance are inevitably redrawn.
The debate on ESG and defence will not end here. The balance between sustainability, security, and geopolitics remains dynamic.
Sources
Commission Delegated Regulation (EU) 2025/1775 (28 August 2025), published in the Official Journal on 30 December 2025, amending Delegated Regulation (EU) 2020/1818 on the definition of weapons in the context of sustainable benchmarks
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ%3AL_202501775
Replacement of the term “controversial weapons” with “prohibited weapons” to ensure legal clarity and consistency
https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=OJ%3AL_202501775
Euronews: EU opens door to ESG labels for companies producing controversial weapons
https://www.euronews.com/my-europe/2025/11/26/eu-opens-door-to-esg-labels-for-companies-producing-controversial-weapons
European Commission – Defence Readiness Omnibus
https://defence-industry-space.ec.europa.eu/eu-defence-industry/defence-readiness-omnibus_en
Bruegel analysis on reputational risk and defence financing
https://www.bruegel.org/analysis/sustainability-rules-are-not-block-eu-defence-financing-reputational-fears-are