European asset managers are increasingly reintegrating defence-related companies into their investment portfolios as the continent ramps up its military preparedness. Over the past year, more than 1,200 European funds overseeing over €790 billion in assets have removed previous restrictions barring investments in companies involved in the production, sale, or distribution of personal weapons and small arms. Simultaneously, more than 700 funds with €540 billion in assets have lifted exclusions on military contractors, according to Morningstar data.

Patrick Thomson, chief executive for Europe, the Middle East, and Africa at JP Morgan Asset Management (JPMAM), characterized this shift as a response to evolving views on defence, describing it as an essential social mission. In April, JPMAM’s banking division announced an expansion of its $1.5 trillion, 10-year security and resiliency initiative across Europe, focusing on defence, energy, and strategic technologies. Shortly thereafter, the firm removed small-arms exclusions from 30 exchange-traded funds managing nearly €40 billion.

The trend extends beyond conventional weapons. Data indicates that 257 funds, controlling about €160 billion in assets, have rescinded exclusions concerning “controversial weapons,” encompassing anti-personnel landmines, cluster munitions, and chemical, biological, and nuclear arms. The move may reflect recent policy changes by several NATO members in Eastern Europe—including Poland, Lithuania, Latvia, Estonia, and Finland—that have withdrawn from the Ottawa Convention, a 1997 treaty banning anti-personnel landmines.

However, not all institutional investors have embraced this change. Norges Bank Investment Management, which oversees the world’s largest sovereign wealth fund, acknowledged in its latest annual report that excluding weapons manufacturers has negatively impacted returns. Norway recently commissioned a review of the fund’s ethical investment guidelines to better align with national interests, but large defence companies such as BAE Systems, Lockheed Martin, and Safran remain excluded.

Similarly, Denmark’s PFA pension fund lifted its ban on investing in major European arms manufacturers following the Russian invasion of Ukraine, reporting a 371% return on these defence investments over 34 months. Sweden’s KPA Pension also removed longstanding defence-related exclusions that dated back to the 1990s.

Conversely, some UK-based funds have moved in the opposite direction. The Church of England’s £3.2 billion pension fund reduced its permitted exposure to defence companies, setting a stricter 5% revenue threshold from defence-related activities down from 10%. Additionally, the London borough council of Waltham Forest fully divested from defence companies earlier this year. Thomson noted that growing domestic debates could influence more trustees of UK pension funds to reconsider their defence investment policies.

Efforts to mobilize private capital in support of defence have gained momentum at the institutional level as well. At last week’s NATO summit in Ankara, allies issued a “call to action” urging financial institutions to increase investments in the defence and security sectors. Major banks such as Banco Santander, Barclays, BNP Paribas, Citi, Deutsche Bank, and NatWest have committed to supporting this initiative, reflecting a broader strategy to bolster Europe’s military capabilities through enhanced private sector involvement.