ESG boom: Funding genocide now sustainable, socially responsible

At the end of September, the FT claimed that “Defence is the hot new strategy in ESG [Environment, Social, and Governance] investing.” This was a strange claim. For a minute, I thought it might be about the carbon intensity of the military-industrial complex.

I was wrong. The article was simply celebrating investments pouring into defence, driven purely by the "fear of missing out."

This represents a stark reversal; ESG funds were performing well until 2023. In the late 2010s, sustainable funds were attracting record investments, peaking at over $645 billion in inflows in 2021. By 2023, this trend had reversed in the US, with sustainable funds seeing net outflows.

The numbers support this trend: European defence stocks have massively outperformed the broader market. The Stoxx Europe Aerospace and Defence index, which includes BAE Systems, Rheinmetall AG, and Airbus, is up 50% in early 2025. This surge is creating powerful FOMO among ESG investors.

According to Morningstar, the global defence industry is entering a new "supercycle," because of “geopolitical tensions, including Russia's invasion of Ukraine and Indo-Pacific conflicts”, and newly enlarged NATO. Companies like General Dynamics, Rheinmetall, and BAE are positioned to benefit most from rising defence spending. 

This shift raises a crucial question: whose ESG standards are being used? ESG stands for Environmental, Social, and Governance, and is a framework meant to direct capital toward companies that are managed sustainably and ethically.

ESG ratings for funds come from various agencies like Sustainalytics, Refinitiv, S&P, and MSCI, each with different methodologies for evaluating companies on metrics like carbon emissions and labour practices.

So, there is no uniform definition of ESG ratings and no uniform definition of ESG that bans investments into defence. The UK Financial Conduct Authority recently stated there is "nothing in our rules" that prevents investment in defence companies. The European Commission also affirmed that its sustainable finance framework is "fully consistent" with funding the defence sector.

The same "sustainable" funds that were supposed to support a better future are now pouring money into defence companies. They call it a "hot new strategy," driven by fear of missing out on profits. The FT article confirms that the French bank BNP has relaxed its own policy on financing warfare, dropping a ban on “controversial weapons”. This confirms that the system is broken — the idea of using ESG to restrain capitalism is dead.

Consider the context: according to the Stockholm International Peace Research Institute, world military expenditure has risen for a decade, reaching a record $2.7 trillion in 2024 — the steepest year-on-year increase since 1988.

So what ESG metrics does a company like BAE qualify for when 12 minutes of an F-35 flight consumes as much energy as a year's average use of a petrol car? Or when we examine job creation?

For every $1 billion invested, the military creates about 11,200 jobs. Compare this to 26,700 in education, 16,800 in clean energy, or 17,200 in health care. While military spending creates jobs, civil sectors consistently generate more employment per dollar.

Furthermore, warfare devastates the natural environment in conflict zones, with long-lasting damage to water resources and ecosystems — a catastrophic externality rarely factored into ESG equations.

Francesca Albanese’s report, called “From Economy Of Occupation To Economy Of Genocide,” says that the military-industrial complex has become the economic backbone of the Israeli state, which is committing genocide in Gaza and explicitly names defence firms Lockheed Martin, Leonardo, Elbit, etc.

What we're witnessing is a state-directed solution to surplus capital. Through massive military budgets, governments create an artificial but highly profitable frontier.

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The US recently passed the National Defense Authorization Act for fiscal year 2026, authorising $883 billion for defence spending. This comes on top of a separate $150 billion defence increase signed in July, collectively pushing military spending over the historic $1 trillion threshold.

This isn't a new phenomenon. During the Cold War, economist Seymour Melman warned that the "military-industrial complex" acted like a parasite, draining money and talent from the civilian economy.

Today's critics argue that massive military allocations are especially egregious given simultaneous cuts to social programs like healthcare and education.

This model is being copied by US allies in the UK and the EU. The European Union's €800 billion "ReArm Europe" initiative is designed to stimulate private investment. According to Corporate Knights, it signals to investors that defence buildup is both encouraged and considered a positive option for sustainable funds.

Scholar Thomas Oatley, in his book  The Military Dimension of American Hegemony, shows a direct link between military spending and global economic instability. His research finds that when the US spends massively on the military, it creates dangerous economic bubbles that destabilise the global economy.

Meanwhile, a funding explosion is occurring in defence technology. A recent Dealroom report shows European defence tech startups on track to raise $13.7 billion in 2025 — more than double the previous year's total. AI is the dominant force, attracting nearly $1 billion in funding this year alone.

Simultaneously, warnings are emerging about a speculative AI bubble. One analyst notes the AI bubble is 17 times the size of the dot-com frenzy and four times the subprime bubble. The conclusion is stark: an economy already at stall speed could fall into recession when the data-centre and wealth effects reverse, just as they did in the 2001 dot-com collapse.

The pursuit of geopolitical advantage through military tech is supercharging a speculative boom that threatens to trigger the very economic crisis it claims to prevent. ESG's embrace of defence spending reveals the emptiness of sustainable investing and highlights how capitalism ultimately co-opts and neutralises its critics.

Nandita Lal is an independent researcher on climate change and Indigenous People. She stood as an anti-war candidate in the General Election in the UK in July 2024

Follow Nandita on X: @ditalalmolloy 

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Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff, or the author's employer.