In response to the evolving geopolitical landscape and the ongoing war of aggression against Ukraine, the European Union is undergoing a transformation in its approach to defence policy and industrial capability.

In March 2025, the European Council announced that the EU will accelerate the mobilisation of financial and regulatory instruments to bolster its defence readiness. This culminated in the release of the White Paper for European Defence – Readiness 2030 and the subsequent Defence Readiness Omnibus Proposal in June 2025 .

These instruments reshape how the EU conceptualises defence investment, not only as a matter of national security but as a legitimate and necessary pillar of the Union’s economic, technological, and sustainability goals.

The European Council has explicitly invited the European Commission to:

• Mobilise private financing for the defence industry, and
• Signal to investors that defence is vital to Europe's resilience and values by removing any unnecessary barriers to their investments.

Defence is being repositioned from a reputational liability to a legitimate, even necessary component of sustainable finance.

The Case for Dual-Use Investments in Article 8 SFDR Funds

Many Article 8 SFDR funds already include exposure to companies developing dual-use technologies such as cybersecurity, AI, sensors, secure communications, drones, and clean mobility platforms.

With the White Paper and Omnibus Regulation, the EU is explicitly stating that:

• Dual-use innovation is central to EU security, and
• SMEs and mid-caps developing such tech are vital to European competitiveness.

The Defence Readiness Omnibus proposal simplifies the compliance landscape across REACH, CLP, Biocidal Products, and Persistent Organic Pollutants regulations, reducing operational frictions for dual-use producers. It also reformulates how the European Defence Fund (EDF) operates, enabling co-financing Member States and firms to access project results under fair terms and use test sites outside EU borders.

If your portfolio already includes dual-use companies, you’re ahead of the curve. These holdings now benefit from:

• Regulatory simplification that lowers compliance costs,‍
• Increased demand from Member States, and‍
• Eligibility for EU funding and procurement contracts through EDF and SAFE instruments.

What This Means for Private Equity Investors

The Commission has clarified that the SFDR does not prohibit defence investment. It has issued formal clarifications confirming that Article 8 funds can responsibly allocate capital to defence, provided adequate transparency is ensured.

Nevertheless, for funds considering new exposure to the defence sector, we recommend communicating the shift in your investment strategy by updating your prospectus disclosure to avoid misleading limited partners (LPs). Defence may be justifiable under EU sustainability logic, but LPs may have differing expectations.

In particular, we recommend updating your SFDR prospectus disclosures to reflect:

• The strategic importance of these investments,
• The EU’s endorsement of defence-readiness and dual-use innovation, and
• The continued alignment with sustainability objectives under Article 8.

To provide clarity for investors, the European Commission has published specific guidance on how defence-related investments should be treated under the SFDR. The Commission highlights three Principal Adverse Impact (PAI) indicators that are especially relevant when evaluating defence-related investments:

• Violations of UN Global Compact principles and OECD Guidelines for Multinational Enterprise
• Lack of processes to monitor compliance with these frameworks
• Exposure to controversial weapons

These indicators do not prohibit investments per se, but they do require investors to:

• Evaluate and monitor human rights risks, and
• Ensure companies have appropriate due diligence mechanisms in place.

For example, under the UN Global Compact, companies are expected to respect human rights and avoid complicity in abuses. Similarly, the OECD Guidelines (Chapter IV) encourage firms to prevent and mitigate adverse impacts linked to their business operations, even indirectly, and to implement human rights due diligence proportionate to risk and operational context.

The Commission balances out the potential adverse impacts of the defence industry on these principles with the indispensability of such activities to ensure that Member States have the equipment necessary to protect EU citizens. The Commission also emphasises that the EU’s defence industry has the potential to contribute to our common peace and security, in line with UN Sustainable Development Goal 16: Peace, justice and strong institutions.

As regards the exclusion of controversial weapons, the SFDR defines “controversial weapons” narrowly and specifically, covering only:

• Anti-personnel mines
• Cluster munitions
• Chemical weapons
• Biological weapons

These weapons are either banned under international law or prohibited by the majority of EU Member States. Nuclear weapons are not covered under this definition, as only three EU countries (Austria, Ireland, and Malta) are signatories of the separate Treaty on the Prohibition of Nuclear Weapons. All EU Member States are instead bound by the 1968 Treaty on the Non-Proliferation of Nuclear Weapons (TNP), which allows certain states to continue their previous nuclear programmes under controlled conditions.

To maintain Article 8 compliance and avoid reputational risk, we recommend continuing to exclude the four explicitly defined controversial weapon categories in line with the PAI framework. Exposure to nuclear weapons manufacturers should be carefully assessed and transparently disclosed.

The Commission also clarifies that defence-related companies may still report Taxonomy-aligned CapEx and OpEx for eligible horizontal activities. These include:

• Greening of buildings and infrastructure
• Investment in clean transport
• Activities in data services, manufacturing, and energy-efficient logistics.

Key takeaways

For private equity investors this moment offers:

• A unique investment opportunity in scaling technologies that serve both civilian and military purposes;
• A regulatory framework that is being updated to accommodate and encourage such investments; and
• A compelling narrative to LPs and regulators that dual-use defence is not just compliant, it is also aligned with the EU’s financial strategy

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If you’re unsure whether your disclosures are transparent and precise enough on these points or if you’re just getting started with sustainability reporting compliance, we’d love to have a chat and explore how we can support you.