Roadmap to defence investing

Can responsible investors justify defence exposure?

Question:

Can investors responsibly invest in defence companies while managing ESG risks, and where should they draw the line?

Answer:

Defence investing has become increasingly relevant as global conflict and government spending rise, but it remains complex for ESG-focused investors. According to Jess Cairns, head of responsible investment at Alphinity, the key is not blanket avoidance but having a clear, practical framework that balances responsible investing with investment opportunity.

Most investors already apply strict exclusions to controversial weapons (such as nuclear or banned weapons), often at a zero-revenue threshold. However, beyond that, there is significant variation across the industry, especially when it comes to conventional weapons and indirect exposure.

A major challenge is “dual-use” companies. Many industrial and technology firms produce components that can be used in both civilian and military applications, making it difficult to clearly classify exposure. Cairns notes that even small, generic components can end up in weapons systems, making traditional dual-use vs single-use distinctions unreliable in practice.

Instead, Alphinity’s approach is to:

• Apply a hard exclusion to companies directly manufacturing weapons.

• Allow some indirect exposure (e.g. components or services), but with strict limits.

• Use enhanced due diligence to assess how products are used, who they are sold to, and whether there are risks linked to conflict zones or human rights issues.

This due diligence includes analysing end markets, government contracts, sanctions compliance, and any controversies linked to misuse. For example, a company with a small portion of revenue tied indirectly to defence (around 5% in one case discussed) may still be investable if risks are well understood and managed.

However, the hardest decisions arise when companies are linked to active conflicts. Even minimal revenue exposure can create significant ethical and reputational concerns. In some cases, companies have limited control over how their products are ultimately used, forcing investors to weigh financial materiality against potential human rights implications.

Ultimately, responsible defence investing is about clarity and consistency, not perfection. Investors can participate in the sector, but only if they set clear boundaries, apply rigorous analysis, and remain accountable to stakeholders.

Why it matters:

Defence is no longer a niche or easily excluded sector, it’s becoming a meaningful driver of returns in global markets. At the same time, it carries significant ESG risks, particularly around human rights and conflict exposure. Investors who fail to define their approach may either miss opportunities or take unintended risks. A clear framework helps balance performance with responsibility and builds trust with clients and stakeholders.

Sources:

• Jess Cairns, head of responsible investment, Alphinity

• Michelle Baltazar, executive director of media, FS Sustainability

Timestamps:

00:00 – Why defence investing is back on the agenda

01:19 – How investors began reassessing the sector

02:45 – Mapping exposure and company disclosures

04:50 – Why dual-use classifications break down

07:14 – Building a practical investment framework

11:44 – Balancing risk and return

14:34 – Real-world ethical dilemmas and case studies

18:30 – Key insights from the responsible investment report

We record on Gadigal Land and we pay our respects to the traditional custodians of country and elders past and present.

https://www.fssustainability.com.au/

This podcast uses the following third-party services for analysis:

OP3 - https://op3.dev/privacy