Defense and ESG challenges: why is the financial sector shaking?

Marion Bitoune
Aug 26
2 min read

Updated: Aug 28

Ukraine's invasion has thrust defense from the margins of sustainable investment

strategies to center stage, raising a divisive question: Can security and ESG criteria be reconciled?

For investors, the question is not simply whether or not to include defense in their portfolios, but to integrate a detailed and documented assessment of controversies and their potential impacts.

Concretely, since 2022, European ESG funds exposure to the aerospace and defense sector has increased by a factor of 2.7. This trend has further intensified with the announcement of the "ReArm Europe" plan, and its 800 billion euros in investments scheduled over five years. ESG investors, confronted with geopolitical realities, are redefining their sustainability criteria in the face of security imperatives.

This reallocation requires rigorous sectoral risk assessment. AlphaYoda analyzed the controversy profiles of three European defense leaders, Thales, Dassault Aviation, and Rheinmetall, over 2020-2025 using its solution combining AI and human expertise capable of processing more than 200,000 information flows in real time.

Key findings:

Corruption: the dominant risk. 48% of controversies concern corruption, often transnational, involving multiple jurisdictions.

Armed conflicts: a major reputational issue. The two French groups were targeted in 2022 by an NGO complaint for potential complicity in war crimes in Yemen, in connection with arms sales.

Long timeframe: a latent risk. Contracts signed today can trigger litigation 10 to 30 years later, reinforcing uncertainty and the difficulty of risk management.

Several controversies reached a threshold considered as a potential violation of the UN Global Compact and OECD guidelines. While no formal conviction has been pronounced during the period studied, the severity, frequency, and absence of corrective measures regarding controversies should be cause for concern.

AlphaYoda thus proposes an approach that, beyond observation, aims to quantify the financial and reputational risk linked to ESG controversies, a project whose results will be detailed in the second part of the study.

Download the full study: