Can defence stocks be “ethical”? The government may say “yes”
Published on April 10, 2025 by Blackstone
Recent events in Europe have led to a challenging question for investors who consider ESG (environmental, social, and governance) factors alongside financial ones: can investments in defence or arms stocks be considered ethical?
As with many questions about values and ESG investing, it’s not straightforward to answer. Indeed, if you ask a group of ESG investors, you’re likely to receive a broad range of responses.
Read on to find out why such questions are being asked.
The UK and EU have committed to increasing defence budgets
As peace talks between Russia and Ukraine failed in March 2025, both the UK and EU committed to increasing their defence budgets to support Ukraine and improve security.
Prime minister Keir Starmer said the UK would spend 2.5% of GDP on defence by 2027. This represents a £13.4 billion increase year-on-year compared to February 2025.
Similarly, the EU has launched a programme that seeks to mobilise €800 billion (£668 billion) in funding for defence.
Unsurprisingly, this has led to defence stocks rising.
On 3 March, Reuters reported that defence stocks powered European shares to a record high. The pan-European STOXX 600 index, which tracks the European equity market, increased by 1.1%. Defence stocks saw significantly higher returns. Germany’s Rheinmetall, Italy’s Leonardo, the UK’s BAE Systems, and France’s Thales all experienced jumps between 13% and 16%.
Ethical funds usually exclude defence stocks
Usually, a fund that’s labelled as “ethical” or “ESG” will exclude arms and defence stocks.
This is because they’re viewed as one of the “sin stocks” – shares in a company that operates in industries that are considered unethical or immoral. As well as arms and defence, sin stocks often include tobacco, gambling, adult entertainment, and alcohol.
Yet, there’s more than one way to view sin stocks and some argue that context is important.
A March 2024 report in the Telegraph suggests some of the UK’s biggest pension funds have blocked plans to boost defence spending on ethical grounds.
However, Chancellor Rachel Reeves reportedly believes investment in the British defence sector is ethical and is working on plans to make it easier for investors to see if ESG funds exclude military spending.
These opposing views highlight one of the key ESG challenges – what’s considered “ethical” can vary hugely between people, and your view might change depending on the situation.
So, can investing in arms be ethical? Ultimately, it’s a personal choice and one you might want to review if you consider ESG factors when investing.
Setting out your values may be useful when considering ESG factors
If you want to incorporate your values into your investment decisions, setting out what’s most important to you could be useful.
For example, are there any industries you wouldn’t want to invest in? Or are there challenges, such as climate change, that you’d like to play a role in solving by investing in companies working on innovative solutions?
As the debate around defence stocks highlights, deciding what is ethical could be more complex than you expect.
You may also need to compromise in some areas when incorporating ESG factors.
You might state you want to avoid investing in fossil fuel companies, which some ethical funds will exclude. However, others may continue to invest in these companies, particularly if they also operate in the renewable energy sector or are funding research into other solutions, like carbon capture.
Setting out what is most important to you could help you weigh up the different options and understand which ones may be right for you.
Your circumstances and long-term goals remain important when deciding how to invest, even if you want your decisions to reflect your values. Simply choosing investments that match your ESG criteria could mean investing in assets that aren’t appropriate for you.
Get in touch to talk about your investments
Whether you’d like to start considering ESG factors when you invest, or you already have an ESG investment strategy, we could help you understand how to invest in a way that aligns with your values and aspirations. Please get in touch to arrange a meeting.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.