As drones buzz Europe, pension funds are revising their investment policies to lift long-standing bans on financing defense companies and position security as a “responsible” investment.
No more is investing in defense stocks akin to putting money into tobacco for most European pension funds.
The institutional investors are adapting to a dramatically changed political landscape that started with Russia’s invasion of Ukraine and was heightened by the increasing US reluctance to protect Europe. This fall’s series of suspected Russian drone incursions in Sweden, Norway, Denmark, Germany and Belgium has spurred European pension funds to revamp their guidelines.
Scandinavian pension funds, including Varma in Finland, KPA Pension in Sweden, and Denmark’s PFA, Danica and AkademikerPension are leading the way by ditching long-term bans on defense stocks.
“A few years ago, before Russia invaded Ukraine, there was a different view on weapons, but that has changed,” Britt Dinesen Christiansen of the industry body Insurance & Pension Denmark told ImpactAlpha. Members of the association, which represents €400 billion ($465 billion) in assets, increasingly see investing in defense in the same way as they do commitments to climate change.
“We can see that there is societal need for expanding defense and security investments,” she said.
Responsible investing
Investors also are moving into defense because of the gusher of public funding as European countries re-arm.
The Danish government, led by Prime Minister Mette Frederiksen, announced in February that it would lift defense spending from 2.4% to 3% of gross domestic product, its highest level in more than half a century. “We are in the most dangerous situation in many, many years,” Frederiksen told reporters at the time, adding that she had told her chief of defense to “buy, buy, buy”.
Betting on defense is precisely what Danish pension funds have been doing.
In the 15 months to April 2025, Danish funds more than doubled their defense investments to close to €19 billion ($22 billion), according to Insurance & Pension Denmark. The increase was driven by pension funds boosting their existing holdings, higher prices for European-listed defense companies and funds adding defense investments to their portfolios for the first time.
“We see a need for contributing and we continue to invest in the right opportunities and are prepared to increase our commitment when the circumstances align,” Dinesen Christiansen said.
In March, the Danish pension fund lobby called on the government to issue defense and security bonds to pay for an additional €16 billion ($19 billion) in national rearmament.
“It would provide clarity for our members, because it will have a government stamp,” said Dinesen Christiansen of IPD.
PFA, Denmark’s biggest pension fund, which oversees €100 billion ($116 billion) for 1.3 million savers, announced in May that it would relax its investment criteria for defense stocks. This opened the door to investments in around 10 new companies, including Europe-based Airbus, Thales and BAE Systems, and Boeing in the US – all of which had been excluded because they did not meet PFA’s policy for responsible investments.
PFA now holds around €1 billion ($1.16 billion) in aerospace and defense companies, according to the firm. Since Russia’s invasion of Ukraine in 2022, PFA’s defense investments have generated returns of 371%, compared with 38% for the broad global index.
“We had a situation where we were restricted from investing in quite a number of, especially European, defense companies, because many of those provide dedicated components to the nuclear defense of France and the UK,” Rasmus Bessing, PFA’s head of responsible investing, told ImpactAlpha. “So we changed the policy.”
PFA still won’t invest in cluster bombs or other controversial weapons, he added.
“While the discussion about investing in the defense of Europe is going on in many European pension funds that I have talked to, we have been quicker in adapting our policies than some funds in Central Europe,” said Bessing of Denmark’s PFA. “You feel the urgency when you are close to Ukraine, the Baltic Sea and Russia.”
Although the Danish government has yet to issue defense bonds, “that is definitely something that we would consider buying,” added Bessing.
Readiness 2030
With major European airports, including Copenhagen Airport, having to temporarily shut down following drone sightings in recent months, and President Trump’s ambivalent stance towards Europe, defense has become a top priority for the EU, which announced an €800 billion ($931 billion) rearmament plan, now called Readiness 2030, in March.
AkademikerPension, a Danish fund which manages €23 billion ($27 billion), lifted the exclusion of six of Europe’s biggest arms makers this summer, saying investing in European defense is “the most responsible thing to do – both in terms of return and social responsibility”.
AkademikerPension CEO Jens Munch Holt told ImpactAlpha that although his fund has increased its exposure to defense stocks quite a bit, “nominally and as a percentage of the overall portfolio it is still quite low.” But he added that valuations are “rich” and that his fund is “more focused on the unlisted space, where we think we can find more interesting investment opportunities”.
Danish pensions provider Danica has made a similar adjustment, removing around 30 companies from its restriction list this spring.
In June, Finnish pension fund Varma, which manages €66 billion ($77 billion), updated its responsible investment principles so it could invest in new business opportunities in the rapidly emerging defense technology sector, including in areas such as satellite systems and software development.
“The sector is making major technological leaps. Companies that previously had no connections to defense technology will benefit from the sector’s transformation, Varma’s deputy CEO Markus Aho said at the time. “By updating our principles, we ensure that we can be involved in this development as an investor.”
Proximity
When it comes to investing in defense, where you stand often depends on where you sit — in proximity to Russia, that is.
Italy’s Previndai pension fund, for example, which oversees €15 billion ($17.5 billion), told Investment & Pensions Europe in April there had been “no changes” to its strategic asset allocation in relation to Europe’s rearmament plan. Previndai declined to comment on questions about its current allocation toward defense when contacted by ImpactAlpha.
French pension funds have also mostly resisted the call, even as government-linked funders, such as Bpifrance, spin up defense funds.
Despite increasing political pressure, very few Dutch pension funds, which manage a combined €1.77 trillion ($2 trillion), have adjusted their investment strategies since the invasion of Ukraine. Most funds won’t invest in firms that make controversial weapons, or parts for nuclear weapons.
Last year, then-defense Minister Kajsa Ollongren accused Dutch pension funds of being “part of the problem” by not investing enough in the country’s defense sector.
“Pension funds don’t buy bullets, so it all must start with a long-term investment plan for the defense industry from the government,” Edith Maat, the director of the Dutch pension federation Pensioenfederatie, shot back on national television. Although both sides have held talks since then, nothing much has changed.
Dual-use
The Dutch pension fund ABP, one of Europe’s biggest pension funds which oversees €519 billion ($604 billion), is a long-time investor in companies that contribute to the defense industry, with commitments ranging from €400 million ($465 billion) to €2 billion ($2.33 billion), depending on how broad a definition is applied, a spokesperson told ImpactAlpha.
The Dutch civil service scheme emphasized that buying defense stocks is different from expanding Europe’s defense capacity, which would need “a consistent investment policy” and a full “multi-year” order book, the spokesperson said. But ABP said it would be willing to provide financing to defense firms that want to expand their production capacity, provided the investments meet its requirements for risk, return, costs and ESG.
PME, a Dutch pension fund which oversees €59 billion ($69 billion), has been a “long-term investor” in defense, with around €200 million ($233 million) in holdings in defense stocks, a spokesman told ImpactAlpha. “We are open for expansion, but there are no plans to adjust our exclusion criteria,” he said.
PME’s investment policy excludes defense companies that make components for nuclear weapons or controversial weapons including cluster ammunition, chemical and biological weapons, landmines or handguns.
Last month, PME committed €40 million ($47 million) to a high-tech defense fund managed by Keen Venture Partners that focuses on innovative European startups and scale-ups focusing on defense and security applications such as advanced drone software, battery technology and radar detection. Keen’s defense fund closed its fundraising this week at more than €150 million.
“These are dual-use technologies that can be used for both defense and civilian purposes,” the spokesman said.
Such versatile technologies offer a safer space for investors grappling with the ethics and optics of defense investing. In London, VentureESG has set up a Dual Use Working Group of LPs and GPs to consider the questions of what is a weapon, what is a war and how to manage risks. “These are all big questions,” the group’s Susan Winterberg and Johannes Lenhard wrote in a July guest post.
“Responsible investors need to step up and take their seats at the table in answering them – the future of war, peace, and technological progress for generations to come depends on it.”
