Europe’s first Article 8 defence ETF promises green investments – for warfare

British firm HANetf, which manages exchange-traded funds (ETFs), is set to become Europe’s first to have a defence-focused ETF classified as ‘sustainable’ under Article 8 of the Sustainable Finance Disclosure Regulation (SFDR).

In plain English, that means the ETF can now be marketed as “sustainability-friendly” under EU rules – even though it invests in defence companies. The amendment is set to come into effect next week, a spokesperson for the company told Impact Loop.

HANetf said it made the change to its ETF in response to growing demand for “responsible defence exposure” as European governments increase military spending.

“Investors increasingly recognise that security and sustainability are not opposing forces – they are interlinked,” said Hector McNeil, co-founder and co-CEO.

Guns and climate overlap

Article 8 funds promote environmental and social characteristics but don’t have to meet a fully sustainable investment objective (that’s reserved for stricter Article 9 “dark green” funds).

Historically, these funds focused on ‘light’ ESG themes such as green energy or social responsibility. But defence investments are increasingly being included – particularly since Russia’s full-scale invasion of Ukraine in 2022.

Article 8 funds’ exposure to aerospace and defence has more than quadrupled since then, as investors balance sustainability concerns with geopolitical realities, according to research by Morningstar Sustainalytics.

Most Article 8 funds exclude controversial weapons such as landmines or chemical weapons (92%), but only a minority apply exclusions for conventional military contracting (31%).

Article 8 funds are moving closer to sectors traditionally seen as off-limits for ESG investors. Last year, Swedish investment firm Finserve Nordic became the first defence fund in Europe to be certified as Article 8.

Defence, long considered controversial, is now entering the mainstream of “light green” investing – showing that sustainability rules and strategic national interests are starting to overlap.

The rise of ETFs for climate

An ETF is like a basket of investments – such as stocks or bonds – that you can buy and sell on the stock market, just like a regular share. It allows investors to put money into a whole group of companies or a specific theme (like clean energy or defence) in one go.

The European active ETF market has experienced remarkable growth, with assets increasing nearly sevenfold since 2019 to €68.6 billion, according to a Goldman Sachs report.

Firms such as BlackRock and ARK Invest have launched European climate ETFs that promise exposure to low-carbon and environmentally responsible companies, tapping into surging investor demand for “green” products.

Yet, as Bloomberg has previously reported, some of these funds still hold companies that are lagging on net-zero commitments or slow to cut emissions – raising questions about how green some so-called green ETFs really are.

The takeaway

While ETFs have strong potential as climate investment vehicles, SFDR labels and marketing alone don’t guarantee transformative impact.

Investors must dig into the underlying holdings to understand where their capital is actually going and whether the fund is aimed at climate solutions, national security, or both.