In light of increased allied defence spending targets, multi-year order books have essentially been made. There are projections for increased spending on security and civil-resilience which include cybersecurity for hospitals and ports, sensor networks for power and transport infrastructure, secure communications for emergency services, demining used in reconstruction, physical protection of critical sites, and instruments that underpin modern defence. NATO has essentially set out a demand signal that forecasts future cash flows for companies aligned in those lanes. The European Investment Bank had already doubled its investments in the defence sector as of January of this year. As demand becomes more predictable, one would expect financing to become easier. Yet many companies that work on civil resilience still face barriers when raising capital from “Environmental, Social, and Governance (ESG)” funds. The reason, surprisingly, often boils down to the index rules and internal fund policies that decide what ESG funds are allowed to buy, rather than actual EU law.
To see why, start with how Europe’s sustainable-finance framework actually works in practice. The Sustainable Finance Disclosure Regulation (SFDR) is mainly about truth in advertising for funds. It sorts funds into familiar buckets (Article 6/8/9) and expects consistent, auditable disclosures. Article 6 funds do not market themselves as “sustainable.” Article 8 funds promote environmental or social characteristics. Article 9 funds have a sustainable investment objective. It also does not, on its own, impose a blanket ban on investing in defence. However, on
November 20th, the Commission proposed SFDR 2.0, which essentially gets rid of the articles as they stand, replacing them with three broad categories: Transition, ESG Basics, and Sustainable. Effectively, it reduces the administrative burden and improves regulatory clarity by the deletion of the “sustainable investment” definition which showed to be complex and inconsistently applied. Additionally, the European Parliament approved a Commission proposal to replace the broad term “controversial weapons” with the more precisely defined term “prohibited weapons”. Demonstrating a move toward narrower, treaty-based definitions to increase legal certainty for investors and facilitate increased defence financing. Separately, there is the EU Taxonomy, which defines what counts as environmentally sustainable activity for labelling and reporting. A company can say that a part of its business is “taxonomy-aligned” if it meets detailed technical criteria. Though, there is no finalised “social taxonomy”, which means that there is currently no EU list that defines which social activities count as “taxonomy-aligned.” The absence, however, of a social taxonomy does not make investment in defence or civil-resilience activities illegal, it simply means funds cannot claim “taxonomy alignment” on social grounds for those activities today. This is further shown in a Notice by the European Commission where they state that the EU sustainable-finance framework is neutral toward the defence sector; only controversial weapons are singled out. On December 16, 2025, the Parliament also voted to adopt the first reading of a Regulation that updates EU sustainability benchmarks. This update ensures companies producing certain high-tech or modern arms are no longer automatically excluded from ESG-labelled indices.
Now bring in the mechanisms that actually allocate ESG-labelled capital. A large share of money labelled “ESG” sits in funds that track an index or keep their holdings very close to an index (“benchmark-aware”). Two widely used climate indices in Europe are the Paris-Aligned Benchmark (PAB) and the Climate Transition Benchmark (CTB). Each index has a rulebook that always excludes controversial weapons. Controversial weapons include anti-personnel mines, cluster munitions, and chemical and biological weapons, but do not include nuclear weapons or conventional military equipment. Some also contain broader exclusions that remove companies classified as “armaments” or “defence,” without distinguishing between offensive weapons and civil-resilience work. On top of index rules, many asset managers have internal policies stated in their fund prospectuses; common wording includes “ex-controversial weapons” and, in some cases, “ex-armaments/defence.” Compliance teams then use these rules when deciding what a fund can hold. An issue arises when index rulebooks or fund prospectuses use broad
“armaments/defence” language as this can cause dual-use companies that service hospitals, ports, utilities, or reconstruction to be screened out alongside firms that produce offensive systems. A company that is excluded by a benchmark or by a fund’s policy then misses out on large pools of passive and benchmark-aware capital, as the company’s bonds or shares cannot be bought, even if buying them would be legal under SFDR and other laws. This is how index methodologies and fund policies often become the binding constraint in practice rather than the law.
Though, with the current global evolutions, several big managers have begun relaxing conventional-defence bans (still excluding controversial weapons) which is widening the eligible buyer base, from very low bases, for some names. Again, consistent with eligibility being the binding constraint and not law. Accordingly, the current discussions are surrounding eligibility and disclosure practices since these are what allow investors to be able distinguish civil-resilience activities from prohibited areas, and companies can understand how today’s rules affect their access to capital. Further evidence on investor behaviour in primary markets and the role of public anchors can help clarify where the real constraints are and how they operate in practice.
Canadian capital is not a bystander in this debate either. Our largest pensions, CPP Investments, Ontario Teachers’, PSP, CDPQ, and OMERS, run large benchmark-aware public-markets books and publish ESG policies that almost always exclude controversial weapons but do not impose blanket bans on conventional defence in policy terms. Like in the EU, eligibility is often shaped by the benchmarks those funds track. On the public-policy side, Export Development Canada (EDC) has updated ESG governance and a specific defence/security posture with enhanced due diligence, signalling that lawful defence and civil-resilience exports can be financed under tighter safeguards. Many Canadian managers also lean on EU benchmarks (PAB/CTB) and their exclusion lists, so European rulebooks can indirectly govern Canadian ESG-labelled flows too. In fact, the eligible buyer set for Canadian-relevant companies (and for allied issuers that sell into Canadian projects) widens as managers begin to relax defence prohibitions. In Canada the supply side is already lining up with NATO-relevant demand. MDA Space, for example, is supplying Earth-observation capacity that underpins resilience (RADARSAT replenishment to secure critical data). These are precisely the dual-use projects that benefit when eligibility is clarified: lawful under EU and Canadian rules, but sometimes screened out by broad “armaments” language until disclosures and index rules catch up.
Because the controversial area of defence sector investment under ESG criteria sits next to politics, the “warwashing” concern is inevitable and legitimate. Warwashing encompasses the rebranding of investments in weapons and defense companies as “socially responsible” or “sustainable” investing (ESG). Experts have outlined that to avoid warwashing, the focus must be in narrow scoping (civil-resilience end-uses only), clear exclusions of controversial weapons, though recent EU Parliament decisions may muddy these waters, and auditable end-use disclosure on proceeds and contracts. That lets funds differentiate eligibility while keeping standards.
Overall, NATO commitments have made security and civil-resilience a steady demand story. If the aim is to finance allied resilience, the job is to modernise the gates so they reflect legal reality and strategic need, while keeping the necessary prohibitions. With higher convergence between benchmark rules/fund policies with what the law already allows, eligible buyer sets are bound to widen and essentially facilitate defence spending.
Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.
