Defence and ESG – A contradiction or a new reality?

Introduction

For decades, defence projects have been seen as a “red line” in ESG strategies. ESG frameworks emphasize transparency, sustainability, social responsibility and good governance – values that often appear at odds with military infrastructure such as barracks, logistics hubs and data centres. Yet, as geopolitical tensions rise and ESG regulation becomes more sophisticated, the question emerges: are defence and ESG truly incompatible, or can they coexist in a new reality?

This article examines the regulatory interplay between ESG considerations and defence infrastructure, reviews forthcoming legislation in Europe and the UK, and explores why military facilities could align with, rather than oppose, ESG principles.

 

The historical ‘red line’

Traditionally, ESG-focussed investors avoided defence because of ethical concerns and regulatory uncertainty. The main issues were the association with weapons manufacturing and the lack of clarity on whether defence investments could qualify under sustainable finance frameworks.

Recent policy shifts, including the EU’s Defence Readiness Omnibus and updates to the Sustainable Finance Disclosure Regulation (SFDR), indicate a change. The European Commission now clarifies that the EU Taxonomy doesn’t automatically exclude defence financing, provided the investments support sustainability objectives like national resilience or societal stability.

 

ESG regulation meets defence

Military real estate – such as barracks, logistics hubs and airfields – can meet ESG criteria if they incorporate energy efficiency, renewable energy and green building certifications, while ensuring social safeguards for workers and communities.

These measures can reduce energy costs, improve operational readiness and align with environmental goals. Internationally recognised certifications offer measurable sustainability benchmarks, and strong social safeguards are essential for public acceptance and regulatory compliance.

 

Nuanced realities

Despite regulatory progress, the compatibility of defence and ESG remains debated. The defence sector faces unique ESG challenges, especially regarding social and ethical considerations. The tension between defence activities and the United Nations Sustainable Development Goals –particularly those promoting peace and justice – is still a concern for many institutional investors.

While some funds are reconsidering their exclusion of defence assets in light of recent geopolitical events, there’s still no consensus on what qualifies as an “ESG-compliant” defence investment. Many asset managers exclude controversial weapons and even conventional defence assets are subject to ongoing debate. Projects linked to weapons manufacturing carry significant reputational and governance risks.

Even with energy efficiency and green certifications, the core purpose of supporting military operations can raise ethical questions. It’s recommended to run robust due diligence, ensure transparency and set clear boundaries for activities that conflict with international norms.

Rather than viewing defence and ESG as mutually exclusive, sector leaders advocate for a principles-based approach. This means screening investments for compliance with international humanitarian law, conducting human rights due diligence, and assessing environmental impacts throughout the asset lifecycle.

Engaging with companies on responsible business conduct and transparency helps distinguish between defence activities that support legitimate security needs and those that pose unacceptable ESG risks.

 

Market practice: The case-by-case approach

Most market participants now assess defence-related ESG issues individually. There’s neither a blanket exclusion nor universal acceptance. Regulatory bodies, including the European Commission, stress that defence investments must be carefully evaluated to ensure they don’t significantly harm other sustainability objectives. This pragmatic approach is increasingly reflected in both policy and investment decisions.

 

Practical takeaway for real estate

Military real estate projects can achieve ESG compliance by adopting specific practices and recognized standards, but the sector is under scrutiny. The prevailing approach is to evaluate each project on its own merits, weighing its contributions to national resilience against potential ESG risks.

Environmental strategies – such as energy-efficient technologies, renewable energy, green certifications, and circular economy principles – help reduce carbon emissions and enhance resilience. Socially, building strong community relationships and ensuring occupational health and safety are priorities. On governance, transparency in ESG metrics and strict compliance with anti-bribery and anti-corruption laws are essential, especially in public-private partnerships and sale-leaseback arrangements.

 

Conclusion

Military infrastructure can align with ESG principles through energy efficiency, renewable systems, green certification, social responsibility and ethical governance. But the debate over the compatibility of defence and ESG continues.

Leading real estate brokers and analysts emphasize the need for careful, case-by-case assessment. For institutional investors, the intersection of defence and ESG presents both opportunities and challenges, requiring a nuanced, evidence-based approach that balances national security with sustainability and ethical considerations.