Understanding defence exposures in portfolios

Defence has re-emerged as a material consideration for investors. This shift is not being driven by a broad change in ethical views, but by a changing geopolitical backdrop. Rising global tensions, increased government defence spending, and a renewed focus on national and economic security have brought defence-related companies back into sharper focus.

Defence is no longer confined to a clearly defined sector. Many companies linked to defence now operate across areas such as aerospace, engineering, cybersecurity, energy systems, and advanced manufacturing. In practice, this means they are embedded within broader industrial and technology supply chains. As a result, defence exposure is increasingly appearing across global equity markets and diversified portfolios – not just within dedicated defence strategies.

The continued growth of index investing has also contributed to this trend. Funds that track major indices aim to replicate both the performance and composition of those benchmarks. As defence-linked companies grow and become part of widely used indices, they are often included by default in index-tracking portfolios. Over time, this has led to a gradual increase in defence exposure, even where it isn’t an intentional investment decision.

At the same time, some asset managers have revisited their approach to weapons-related exclusions. This partly reflects clearer regulatory definitions of defence activity, as well as the challenge of balancing exclusion policies with the goal of closely tracking broad market indices. In some cases, client demand for lower deviation from benchmark returns has also played a role. The result is that defence-related companies can now appear across a wider range of strategies – including some with ESG or sustainability labels.

This creates a more nuanced landscape. Defence does not sit neatly within many responsible investment frameworks. It is often viewed through competing lenses – ethical concerns around weapons production on one hand, and considerations of national security and deterrence on the other.

For investors, this means a portfolio may meet certain sustainability criteria while still including defence exposure, depending on how exclusions are defined and applied. These can vary widely, from zero-tolerance policies to revenue-based thresholds, and may or may not extend to companies involved indirectly through supply chains.

As defence exposure becomes more embedded across markets, many investors are increasingly asking a simple question: where does this sit within my portfolio?

At Craigs, we recognise that views on defence differ from one investor to the next. Our role is to provide clarity – helping you understand where exposure exists, how it is defined, and what choices are available. Through detailed analysis and open conversations, we support clients to make informed decisions with confidence, ensuring portfolios remain aligned with both their investment objectives and personal values.

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