Why Europe must not allow defence investments to be labelled sustainable

August 27 - Europe is entering a new era of defence spending. The European Commission’s proposal for the 2028-2034 multiannual financial framework foresees a near 2 trillion euro budget, with significantly higher allocations for security, Ukraine support and defence capabilities. National budgets across NATO are also rising. This rapid mobilisation has prompted growing calls to classify investments in arms as sustainable or eligible for an ESG label.

In March the European Commission, in its ReArm Europe plan, issued guidance explaining how defence investment could meet criteria under the Sustainable Finance Disclosure Regulation (SFDR) and the ESG taxonomy by contributing to the U.N. Social Development Goal 16 (peace, justice, strong institutions).

While this would exclude "controversial weapons", including anti personnel mines, cluster munitions, chemical weapons and biological weapons, there are major gaps: nuclear weapons, incendiary munitions, depleted uranium ammunition, blinding lasers, undetectable fragments and more remain outside the minimum legal scope.

Besides the high reputational risk of funding companies involved in the production or trade of weapons, some argue that defending democracy and critical infrastructure is “a prerequisite” for sustainable investment goals and for minimising ESG risk to corporates. Yet this argument blurs the primary purpose of ESG: to channel capital toward activities that protect and enhance human and ecological wellbeing – not those designed to destroy.

While governments and regional bodies have the right to choose how they defend themselves, banks and other financial institutions should not be incentivised to profit from trade in arms used in conflict. In our view, the financing of weapons and arms is at odds with any definition of sustainable finance. The current policy debate in Europe risks normalising “warwashing”, the rebranding of weapons finance as socially responsible investing.

Weapons production and trade are – by design – intended to harm. Beyond the direct human toll, the arms sector is repeatedly associated with corruption risks, opaque supply chains, export-control breaches and severe governance failures.

Civilian casualties, displacement and long-term contamination (think unexploded ordnance or depleted uranium) impose social and environmental burdens that last for generations. Labelling investments in such activities as “sustainable” undermines public trust and is at odds with investor intent.

The world is living through the highest number of violent conflicts since World War Two. The United Nations estimates that roughly 2 billion people – one quarter of humanity – live in places affected by conflict.

The 2025 Global Peace Index again reports a decline in global peacefulness, with 59 state-based conflicts, and escalating humanitarian and economic costs.

Meanwhile, global military expenditure reached an estimated $2.7 trillion in 2024, the fastest multi-year increase in recent history, according to the Stockholm International Peace Research Institute.

Every euro channelled into armaments is a euro not invested in climate resilience, affordable housing, regenerative agriculture, or the small businesses that keep communities thriving.

In a new position paper from 12 values-based and church affiliated banks, including several members of the Global Alliance for Banking on Values (GABV), we call on EU lawmakers to adopt a clearer, treaty-anchored definition of controversial weapons that reflects humanitarian norms and widely applied ethical investment screens.

The financial industry should not profit from the increase in military defence’s spending. This is a government matter, not a business prerogative. As a network of the world’s leading sustainable banks, GABV has long demonstrated that finance can thrive without profiting from weapons. A position paper in 2024, called the Milan Declaration, reaffirms a complete exclusion of financing for weapons and arms.

The Milan Declaration invites other financial institutions to follow suit.

Military and defence should never be seen as a business opportunity, but as a government mandate that must be funded publicly rather than by the private sector.

Financial institutions should publicly disclose all direct and indirect weapons-related exposures across lending, investment and underwriting activities. They are encouraged to adopt exclusion policies that exceed minimum regulatory requirements, and cover all types of weapons systems.

Investors and clients can play a role by requesting information on weapons exposure in ESG-labelled products and by choosing financial institutions that align with their values and support global peace.

Finance is never neutral. In a world of escalating crises, where public funds are split between defence and the urgent investments needed for climate action and social goals, the allocation of capital is critical.

Sustainable finance cannot include weapons. Upholding the integrity of ESG – and the credibility of finance as a force for good – depends on making this distinction clear.