With global conflict driving investor interest in defence sectors, Dugald Higgins, head of responsible investment at Zenith Investment Partners, says excluding defence from portfolios can raise difficult questions for investors.
The current environment presents one of the clearest examples yet of how responsible investing is moving beyond screening frameworks and into a more complex and politically charged space. This is particularly pertinent as the Federal Government has endorsed recommendations that the Department of Defence establish a framework to enable investment providers to identify suitable finance options for future defence requirements. In April 2026, the Government also announced a $53 billion increase in defence spending over the next decade.
This follows a global trend where geopolitical tensions and government rearmament programs are driving inflows into defence exposures.
Higgins says responsible investment represents a broad spectrum of different investment approaches and isn’t binary. Depending on how fund managers design their strategies, different elements can be utilised within a broader 'responsible' framework.
“Responsible investment is a priority for many investors, and for years armaments have often been screened out as part of that ethical position,” Higgins says.
“However, being 'responsible' doesn’t necessarily mean being 'ethical', nor is being ethical the same as incorporating ESG considerations into an investment process.”
Investors may hold indirect exposure to the defence sector through logistics businesses, manufacturers, and technology or communications companies whose products and services are used in military settings or conflict zones. Exposure can also come through sovereign debt, including government bonds issued by countries involved in arms exports.
“The line is much harder to draw than many investors realise,” Higgins says.
“Like it or not, even the best-intentioned investors probably have some exposure to the defence sector given its broad nature of supply chains and activities. At the very least, investors can be indirectly exposed through government bonds from countries involved in arms exports such as the US, the world’s largest arms exporter.”
Global issuance of defence ETFs has more than doubled over the past year, while assets under management have increased five times to A$109 billion. Despite this, over 90 per cent of those assets are issued by managers that are signatories to the UN-backed Principles for Responsible Investment, highlighting an increasingly visible contradiction within the market.
Higgins says one of the biggest challenges is defining what defence exposure actually looks like in modern portfolios, with the debate moving from the margins to the mainstream.
“We are seeing significant growth in defence-related investment vehicles, including from managers that align themselves with responsible investment frameworks,” Higgins says.
“That naturally creates confusion for investors and raises a more fundamental question around whether defence and ESG can coexist. We believe ESG is foundational and would argue its importance when assessing defence companies which pose high levels of regulatory, financial, legal and reputational risks. But the morality of these investments is a different question.”
Defence companies can face a wide range of material ESG issues, including human rights violations, corruption, political instability, environmental and health impacts, land contamination and high carbon emissions.
Higgins says investors should be wary of treating the sector as either automatically acceptable or automatically excluded without deeper analysis.
“Investors are rightly reassessing the role of defence thematics in portfolios, particularly as the geopolitical landscape changes”, Higgins says.
The attractions are undeniable, given that the average one-year return for defence themed ETFs on the ASX was 32.4% for the year to 31 March 2026, versus 11.6% for the ASX 300 Index.
“But capital moving into this sector needs to be assessed through a genuine ESG lens. Labels alone are not enough. Investors need clearer definitions, greater transparency and a more rigorous understanding of the risks involved.”
