Evolution of EU Taxonomy Treatment of the Defence Sector: From Exclusion to Conditional Integration

Between 2022 and 2025, the European Union’s approach to defence within its sustainable finance framework has evolved from categorical exclusion to conditional acceptance. Initially labelled as socially harmful in early Platform on Sustainable Finance reports, defence-related activities were excluded from ESG-aligned portfolios, particularly those involving controversial weapons. However, the war in Ukraine and the resulting reassessment of European security priorities led to a regulatory and political shift.

By 2024–2025, the European Commission, ESMA and the European Investment Bank had clarified that conventional defence investments are not prohibited under the taxonomy or SFDR, provided they respect international law and exclude banned weapon systems. Germany has played a leading role in this shift, aligning financial policy with national rearmament strategies and lobbying to eliminate unjustified exclusions in ESG criteria. For investors and fund managers, this transition opens new opportunities.

Defence firms, particularly those active in dual-use technologies or aligned with European strategic autonomy goals, are no longer automatically excluded from Article 8 or Article 9 funds. While such investments are still not taxonomy-aligned under environmental criteria, they are now considered admissible if they meet minimum social safeguards. Major asset managers have already adjusted internal policies to reflect this position, and regulatory guidance confirms that defence, under specific conditions, can be reintegrated into ESG strategies.

As a result, capital previously constrained by reputational and regulatory uncertainty can now support a sector considered essential to Europe’s stability, security, and technological resilience. In the initial phase of the EU’s sustainable finance taxonomy development, the defence industry was largely viewed through a lens of exclusion. Early deliberations – notably the work of the Platform on Sustainable Finance in 2021–2022 – considered certain defence-related economic activities as fundamentally “socially harmful” and thus incompatible with sustainability objectives.