United Kingdom's Exit from the European Union: An Overview
Title: Brexit opens the door for ESG funds to back defense stocks
Want to invest in weapons? It seems that's becoming a popular choice, thanks to Brexit and Europe's increased defense spending following Russia's invasion of Ukraine.
Author: David RickettsDate: May 28, 2025 (19:00)
The UK's departure from the EU initially made collaboration in the defense sector tricky, but recent agreements—like the new security and defense partnership—have given British defense firms a chance to participate in the EU's €150 billion "Security Action for Europe" fund. This re-engagement has opened up a world of opportunities for UK defense companies such as BAE Systems and Babcock, as both the EU and UK beef up their military might in response to geopolitical instability.
This has had a considerable impact on ESG (environmental, social, and governance) funds, traditionally avoiding defense stocks, especially those producing controversial weapons, due to moral, legal, and reputation-related concerns. However, conventional defense—such as tanks, firearms, and aircraft—is seeing a resurgence as a potential ESG investment, especially as European nations boost their defense budgets.
The war in Ukraine and escalating geopolitical tensions have driven up the value of European and UK defense stocks. UK defense stocks have tripled since the conflict began, while major indices show a 54% gain in 2025 alone. This growth is due to projected long-term increases in defense spending, with NATO countries expecting to allocate an additional $200 billion over the next decade for research, development, and procurement. This has forced ESG funds to reconsider their exclusion policies, with an increasing number cautiously re-engaging with the defense sector.
Although Brexit didn’t directly cause this shift in ESG attitudes towards defense, it has played a role in shaping the market environment in which these funds operate. Post-Brexit agreements have given UK defense firms access to EU markets and funding, making them more attractive to both EU and UK investors. Regulatory alignment and investment flexibility in the UK post-Brexit have also influenced the inclusion of conventional defense stocks in ESG funds that previously excluded them.
| Factor | Pre-Ukraine War/Pre-Brexit | Post-Ukraine War/Post-Brexit ||-----------------------------------|----------------------------|-----------------------------------------------|| ESG Fund Attitude to Defense | Mostly exclusionary | Increasing inclusion (cautious, selective) || Defense Stock Valuation | Stable | Soaring (tripled since war, 54% in 2025) || UK Access to EU Defense Funds | Limited (pre-deal) | Full access (post security partnership) || Regulatory Coordination | Unified | Aligned but flexible post-Brexit |
In sum, while Brexit did not directly lead ESG funds to invest in defense stocks, new UK-EU defense partnerships have boosted UK defense firms' access to European markets and investors, indirectly supporting the trend of growing interest in defense stocks. Additionally, the war in Ukraine and increased European defense spending have led to a reconsideration of conventional defense's role in ESG portfolios, with a cautious move towards inclusion. Regulatory flexibility post-Brexit has also contributed to this, allowing UK funds to interpret ESG criteria in ways that may increase their exposure to defense, although outright exclusions remain common for controversial weapons.
With Brexit paving the way for UK defense firms to access the €150 billion "Security Action for Europe" fund, traditional ESG funds are reassessing their stance on defense stocks, particularly conventional ones like tanks, firearms, and aircraft. The war in Ukraine and geopolitical tensions have driven a resurgence of defense stocks as potential ESG investments, due to increased defense budgets across Europe.
The regulatory alignment and investment flexibility in the UK post-Brexit have also influenced the inclusion of conventional defense stocks in ESG funds that previously excluded them, further fueling this trend. While outright exclusions of controversial weapons remain common for ESG funds, a cautious move towards inclusion of conventional defense stocks is becoming more prevalent.
