By Joel Kranc
The first six months of 2025 have been a whirlwind of policy shifts, global alliance upheavals, and non-starter discussions aimed at ending wars around the world. The volatility around U.S. policy and its questioning of long-standing post-WWII norms have inspired governments and investors around the world to re-evaluate priorities.
For many institutional investors — especially ESG-aware funds — defence stocks were once off-limits and shunned. Now, large pension funds in Europe are rearranging their investment policies to include the defence sector, especially in mainstream aerospace, dual-use tech, and infrastructure.
While some exclusions still persist around nuclear and controversial weapons, the strategic environment of 2025 has reshaped thinking, and fund policymakers are increasingly accepting — or even encouraging — defence sector exposure.
Why?
Geopolitical instability — marked by Russia’s 2022 invasion of Ukraine, intensifying NATO expectations, and rising military expenditures — has spurred a re-evaluation of these positions.
There has been pressure from Western governments with calls to re-arm Europe, creating demand for capital in defence industries. In fact, NATO members agreed earlier this summer to a big increase in their defence-spending target to 5% of gross domestic product, as demanded by President Donald Trump.
“This will likely involve not only higher investment in defence according to the agreed NATO definitions but also additional investment in related areas like infrastructure and resilience,” said Allison Hart, spokesperson for NATO, in a press report.
According to reports in the press, in the first six months of 2025, European defence M&A by value reached $2.3 billion, 35% higher than the same period last year and higher than 2024’s annual total. Globally, the combined value of aerospace and defence transactions in H1 2025 stood at $21.7 billion, more than double that of H1 2024 and the highest figure since the same period in 2021.
European Arms Race
Specifically, large institutional investors like Denmark’s PFA Pension, with approximately $120 billion in assets under management, revised its Responsible Investment policy in May 2025 to allow investments in defence and aerospace companies—such as Airbus, BAE, Boeing, Thales—while continuing to exclude controversial weapons manufacturers
“The world has changed significantly since Russia’s invasion of Ukraine, and there is both here at home and broadly in Europe, a growing understanding that we need to invest more in defence to safeguard our own security,” said Rasmus Bessing, the PFA’s director of responsible investing, in a statement.
AkademikerPension (Denmark) announced in April–June 2025 that it is relaxing restrictions on arms manufacturers and investing in defence-related infrastructure, including barracks construction. “We believe it is the most responsible thing to do – both in terms of return and social responsibility in the current situation,” CEO Jens Munch Holst said. We don’t want a small turnover from nuclear weapons-related activities to prevent us from providing capital to support the building of a European defence, he added.
Also, Varma (Finland’s earnings-related pension provider) updated its investment guidelines in June 2025 to permit investments in defence-related technology, satellite systems, cyber security, and dual-use innovations.
ABP (Netherlands) via its manager APG is increasing its existing $2-billion to 3-billion allocation to defence and considering expansion over the next five years.
Last March, a Reuters investigation highlighted that Europe’s biggest asset managers, including Legal & General, UBS, Allianz, BNP Paribas, and Mercer, are reconsidering their exclusions on defence stocks in light of client and political pressure for Europe to rearm. The report said the sector’s appeal “has risen dramatically.”
North American public pension funds have not followed suit in 2025. In fact, New York State Common Retirement Fund, with about $273 billion in assets under management, has reduced its defence holdings. Canadian funds also remain cautious, though they acknowledge the sector’s potential amid evolving geopolitical risks.
Ontario Teachers’ Pension Plan CEO Jo Taylor said, “If you look for a sector where there’s going to be more activity and investment over the next five years, it probably is in defence, for all the reasons you know and you’ve seen.”
However, member concerns around weapons manufacturing led to press statements in March 2025 that the fund is reconsidering such holdings and not actively increasing them now.
With no abatement in global tensions and expectations, the shift by pension fund investors towards defence will likely increase over the next years.
