Defense investment under EU Sustainable finance framework: no structural barriers

Introduction

The Wennink report is clear: more investment in the European defense industry is needed. But do the EU sustainable finance framework and the CSDDD pose an obstacle to this? In this article from our series on the Wennink report, we explore how the growing need for defense investment interacts with recent regulatory clarifications by the European Commission. The takeaway: the EU sustainable finance framework is compatible with investment in the EU defense industry.

Wennink report identifies opportunities…

The Wennink report emphasizes that the projected increase in NATO defense spending - from 534 billion dollars to 1,250 billion dollars over the next ten years - presents remarkable opportunities for the Dutch defense industry.

Seizing these opportunities, however, would require a fundamental shift in how The Netherlands operates within the defense value chain. Rather than remaining a component supplier, the Dutch industry should aim to become an Original Equipment Manufacturer (OEM), where long-term knowledge development, economic value creation and cross-sector spillovers are most significant. Dutch companies are well-positioned for this transition, maintaining strong expertise in core defense technologies such as radar and sensor systems, aerospace and photonics. 

All of this requires significant defense investments, that also deliver benefits well beyond the sector itself. Defense spending drives innovation and helps develop technologies critical to, for instance, the energy transition. Innovations in battery technology for drones, for example, could prove crucial for advancing sustainable energy solutions. Conversely, underinvestment in the could have far-reaching repercussions.

… but also an overly cautious investment culture

The Wennink report identifies various reasons for Europe’s investment stagnancy – and, with it, the reasons why its defense industry stands at a crossroads. One factor is the role played by the financial sector. According to the report, defense and security companies have indicated that financing regularly stalls because ESG frameworks are interpreted too strictly. The Wennink report claims that although EU ESG rules do not prohibit such investments, the way these frameworks are applied in practice nevertheless creates barriers to financing. The report calls for a more nuanced approach: responsibly operating defense companies should have access to financing in the same way as companies in any other sector.

European Commission: defense investment is compatible with the sustainable finance framework 

This call to action in the Wennink report coincides with the publication of EU Commission Notice C/2025/4950 on the application of the sustainable finance framework and the CSDDD to the defense sector, issued in December 2025. In the Notice, the Commission confirms that investments in the EU defense industry can contribute to EU resilience, security and peace - and by doing so, enhance sustainability. The Commission further provides guidance on the applicability of the EU sustainable finance framework to the EU defense industry and confirms that it does not impose limitations on financing the defense sector. This appears to be a deliberate policy choice of the Commission to prevent the defense sector from being unjustifiably discriminated against in investment decisions, and to facilitate the EU defense industry’s access to sufficient funding. 

Notably, the Commission adds that EU sustainability disclosure requirements apply across all industries without singling out any particular sector. The EU defense industry is subject to the same disclosure requirements as every other sector under the sustainable finance framework. 

Importantly, the EU sustainable finance framework does not prescribe generic exclusions for financing defense-related activities based on either a percentage of a company’s turnover in defense activities or on a percentage of a fund’s portfolio investment in the defense industry. Excluding defense investments on the basis of such thresholds may disadvantage SMEs, which, due to their specialization demands and size constraints, often cannot diversify into civilian markets.

What does this mean for complying with SFDR?

In the Commission’s publication, it is also discussed what the above means for complying with the Sustainable Finance Disclosure Regulation (SFDR). The SFDR harmonizes disclosures of sustainability information by financial market participants, financial advisers, and financial products in the EU. When a financial product “promotes environmental or social characteristics” or “has a sustainable investment objective”, investors must be provided with standardized precontractual and periodic information in templates that set out how those characteristics are promoted or sustainable investment objectives are met. In those templates, the percentage of investments that meet the legal definition of “sustainable investment” must be indicated, which are investments that:

• contribute to an environmental or social objective,
• do no significant harm to an environmental or social objective, and
• for investments in investee companies, meet the good governance practices.

It is up to the financial market participant to determine when the three conditions are met, provided the methodology is transparent and the criteria are applied consistently across financial products. The Commission’s publication, however, provides useful guidance in respect of the first two conditions.

With respect to the first condition, the Commission encourages financial market participants not to treat defense as a de facto non-contributing sector. Instead, it suggests they assess on a careful, case-by-case basis, whether the economic activities of a defense industry company contribute to social objectives. 

With respect to the second condition, the EU requires that the assessment of “do no significant harm” is based on certain prescribed information, which are the so-called “principal adverse impact indicators” (PAIs). The PAIs include, for example, exposure to controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons) and violations of UN Global Compact principles and OECD Guidelines for Multinational Enterprises, as well as lack of processes and compliance mechanisms to monitor compliance with those principles and Guidelines. 

As a result, the financial market participants should always include information on controversial weapons in the “do no significant harm” assessment. Whether other aspects of the defense industry should be subject to a “do no significant harm” assessment by virtue of PAIs, such as those related to the UN Global Compact principles and OECD Guidelines, is not clear. The Commission in particular encourages the measurement of compliance with defense and dual use-related export control legislations as part of those PAIs.

Conclusion

The Commission draws a clear line: the EU sustainable finance framework is compatible with investment in the EU defense industry, and undue discrimination of the defense sector in investment decisions should be prevented. The framework sets no general limitations on financing of the defense sector. The Commission recommends that financial market participants do not automatically treat defense as a de facto non-contributing sector, but rather carefully assess on a case-by-case basis whether all conditions of the “sustainable investment” definition under the SFDR are met.  With the unambiguous guidance from the Commission, it is now up to the financial sector and investors to seize the opportunities identified in the Wennink report.