July 2, 2025
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:
Defence is being repositioned from a reputational liability to a legitimate, even necessary component of sustainable finance.
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:
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:
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:
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:
These indicators do not prohibit investments per se, but they do require investors to:
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:
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:
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