The defense sector is undergoing a profound transformation, shaped by escalating geopolitical tensions and a reevaluation of strategic priorities. In Europe, and particularly in France, defense budgets are rising significantly in response to current challenges such as the conflict in Ukraine and global peace threats. Investors have increasingly turned their attention to this sector since the beginning of the year, despite ongoing ethical dilemmas.

A sector driven by heightened geopolitical context...

Since the beginning of the year, the defense sector has experienced a remarkable stock market performance, supported by geopolitical tensions and increased military budgets across Europe. In France, companies such as Thales and Dassault Aviation have posted significant gains since the start of the year, up +81% and +51% respectively. Specialized firms like Parrot (drones) and Eutelsat (satellite communications) have also seen their stock prices soar.

Stock Market Performances of Selected Defense Sector Companies

Source: Bloomberg, period from 12/31/2024 to 04/14/2025. The examples are provided for illustrative purposes only and do not constitute investment advice. Past performance is not indicative of future performance. Investing involves risks, including capital loss.

...prompting investor policy shifts among traditionally restrictive players

Beyond investor exclusions, the defense sector inherently carries ESG-related risks such as business ethics, human rights, governance, and environmental footprint. This reputational bias often hinders the inclusion of defense securities in SRI portfolios.

Some stakeholders are calling for a redefinition of ESG criteria to incorporate security and geostrategic considerations, emphasizing that investing in defense is essential to protect sovereignty and democratic values. Others, including key players in sustainable finance in France who had historically excluded companies like Dassault Aviation, Safran, Thales, or Airbus, are reconsidering their stance.

Among institutional investors, Crédit Mutuel Arkéa, a mission-driven company, has published a sector policy combining support for defense with exclusions. The policy excludes weapons regulated by international conventions ratified by France across the value chain, as well as depleted uranium and white phosphorus. It views support for the defense sector as compatible with ESG criteria in light of issues related to national security and sovereignty. In Germany, other institutional players are relaxing their policies as well, such as Allianz GI, amid regulatory easing of exclusion policies.

Agility and pragmatism remain the guiding principles

As active managers, our core mission is to safeguard our fiduciary responsibility to our unitholders. Our clients rely on us for our SRI convictions and agility, regardless of geopolitical or economic developments.

Public funding remains predominant in the defense sector, far outweighing private contributions. For example, in France, BPI is launching an investment fund to inject €450 million in equity into the sector; in Europe, EIB has doubled its financing for the sector, reaching €2 billion in 2025. These figures pale in comparison to France's military programming law aiming to raise over €17 billion by 2030, or the €800 billion plan announced to "rearm Europe". Ultimately, whether asset managers exclude the sector or not, the impact on financial flows will remain limited, especially since defense currently represents a tiny share of stock indices (less than 2%).

At Mandarine Gestion, our approach is based on a clear distinction between conventional weapons used in contracts between states and controversial weapons banned by international treaties. While the first category may be considered under traditional ESG diligence criteria, the second remains excluded from investment practices.

Thus, the defense sector undeniably presents opportunities—provided a balance is struck between state strategic imperatives, client ethical considerations, and the fiduciary responsibility of asset managers. In this context, investors must remain pragmatic while carefully evaluating the risks and opportunities this sector represents today.

Completed on April 14, 2025

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