Five themes for 2025
Theme 4: The case for defence
This series explores the five themes we expect to top the sustainability agenda in 2025. Our fourth theme considers how sustainable goals can be reconciled with the need for a robust defence industry.
Defence will be a prominent topic in 2025, and a meeting of NATO defence ministers in Brussels in February sets the scene. US President Donald Trump has been vocal about his expectations of fellow NATO members’ defence spending and, amid heightened defence priorities in Europe, the meeting should help to determine spending and goals for the coming years. It comes as armed conflict is now one of the top ranked global risks, according to the World Economic Forum.1
The US is the world’s largest investor in defence – its spending is worth about 3.5% of GDP. Last year, NATO Europe met its mandated threshold of 2% of GDP for only the first time since the early 1990s.2 But there is an urgency for European nations to invest more – and more collaboratively – in a resilient, modern defence industry. NATO’s European members are reportedly considering a spending target of 3% of GDP and a possible EUR 500 billion defence fund.
Budget constraints mean there is a need for greater private investor participation. While there has been a significant political shift in Europe towards defence in recent years, investors still struggle to reconcile defence investing with the principle to “do no significant harm”, which is embedded in some sustainable finance legislation. In addition, Europeans generally face more exclusions to their investment universe than US investors do.
It was only after the start of the Ukraine conflict that the European Commission’s final report on the “social taxonomy” omitted describing the defence industry as “socially harmful”. Since then, the European Commission and individual countries have highlighted the necessity of a robust and well-functioning defence sector. Recently, the German government suggested that sustainable finance regulation must not have any impact on financing for the sector. Germany’s financial regulators have published a review of defence assessment criteria for sustainable funds.
A robust defence sector is necessary to provide the means for national and regional security policies and to support economic and social stability. The sector has traditionally been a hub of innovation, driving advancements that extend beyond military applications. However, the subject of arms, particularly certain categories, remains a sensitive topic. There is a need for regulatory clarity and transparency regarding the classification of defence products and services, distinguishing between conventional or controversial arms. Such clarity would not only assist investors in managing reputational risks, but also promote enhanced disclosure practices within the defence sector, encompassing the entire value chain. This approach would foster a more informed and responsible investment environment, aligning with broader societal expectations and ethical standards.
NATO members spending at least 2% of GDP on defence
Source: NATO, Defence Expenditure of NATO Countries (2014-2024)
1 World Economic Forum - Global Risks Report 2025
2 A European defence industrial strategy in a hostile world
- Read the third post in this series: Theme 3: The sovereignty of climate
- Read an overview of our five themes: Sustainable investing in 2025: five themes to watch
