Defense financing: How will banks’ policies respond to the EU’s rush to rearm?

“We are in an era of rearmament.” This blunt assessment in a press statement by European Commission President Ursula von der Leyen in March 2025 underscores the way forward for EU states seeking to beef up their security against geopolitical threats.

In response to Russia’s aggression against Ukraine and doubts about the US commitment to NATO, the European Union is urging member states to boost investments in defense capabilities. EU leaders have pledged to increase public defense spending—even considering easing the EU’s fiscal deficit rules for member states—and are seeking to attract private investment to a sector long avoided due to ethical concerns.

How are banks’ defense policies changing against this backdrop?

ECOFACT’s Monitoring Peer Policies (MPP) program tracks the financing policies of 20 international banks across 21 sustainability topics. Here are some of the developments we’ve identified as ones to watch in how banks approach the defense and security sector.

Defense framed as essential

Banks in France, Spain, and the UK increasingly include references to the UN Charter or the NATO alliance in their policies, emphasizing the right to national and collective self-defense. Some highlight the importance of military equipment to protect democracies and their citizens and reference the EU Council’s May 2024 push to strengthen Europe’s defense industrial base.

Conventional weapons broadly permitted

None of the 20 banks generally exclude financing for companies producing conventional weapons. However, nine conduct enhanced due diligence when arms trading is involved, reviewing weapon types and recipient countries. Dual-use goods—civilian products with potential military applications, such as sensors or lasers, or aerospace and propulsion systems—receive special attention.

Controversial weapons restricted

Fourteen banks exclude financing for companies involved in the manufacture, sales, and distribution of cluster munitions and biological or chemical weapons. Thirteen also prohibit funding for anti-personnel mines.

Positions on nuclear weapons vary:

• Seven banks (mostly US, but also one Swiss) have no public stance;
• Nine (including some in the US and UK) prohibit all financing; and
• Four European NATO-based banks allow financing for firms in Nuclear Non-Proliferation Treaty (NPT) countries.

Autonomous weapons systems—military drones and robotics—are emerging topics addressed by three banks: one excludes financing and two apply enhanced due diligence.

Potential policy shifts on landmines

Five NATO members bordering Russia (Estonia, Finland, Latvia, Lithuania, and Poland) have announced plans to withdraw from the 1997 Ottawa Treaty banning anti-personnel mines. Our MPP program will monitor whether this affects bank policies.

ESG classification under debate

A growing debate questions whether defense investments can align with environmental, social, and governance (ESG) goals. The UK government has stated that funding “high-quality, well-governed” defense firms can be ESG-compatible. Allianz Global Investors, meanwhile, allows conventional and nuclear weapons firms (from NPT states) in most of its sustainable funds, a move followed by UBS Asset Management with respect to conventional weapons.

Record inflows for defense ETFs

Investor sentiment appears to be shifting. In the first quarter of 2025, defense-related exchange-traded funds (ETFs) attracted $4.1 billion in net inflows—72 percent of all thematic ETF inflows in Europe—according to ARK Invest Europe.

European security is expected to be a hot topic on the agenda of the next European Council meeting in Brussels at the end of June. We will continue to monitor this and other developments for potential impacts on banks’ defense-related policies.

Did you know…

The European Commission’s White Paper for European Defence – Readiness 2030 (March 2025) deliberates on the relationship between the Sustainable Finance Disclosure Regulation (SFDR) and the defense sector. It clarifies that the SFDR does not prevent the financing of the defense sector but notes that both the financial and defense industries could benefit from further guidance on how the regulation applies. As part of the ongoing SFDR review, the EU Commission intends to issue clarifications on how defense aligns with the sustainability framework’s investment objectives. ECOFACT will closely monitor these developments and keep our MPP participants informed of any relevant updates.

ECOFACT’s Monitoring Peer Policies program track banks’ positions on 21 sustainability topics — from climate to human rights. Contact us at info@ecofact.com to learn more.