Outlook 2026: Silke Goldberg, partner and global head of ESG at Herbert Smith Freehills Kramer, argues that rising geopolitical risk is forcing a rethink of ESG frameworks, with defence and security increasingly integral to long-term sustainability and societal resilience.
As global challenges reshape priorities, ESG principles are no longer just about sustainability – they are becoming essential for long-term resilience. Yet, into this mix is the fact that, historically, defence companies have often been excluded from ESG portfolios, perceived as incompatible with sustainability goals. That narrative is changing. In a world of rising geopolitical tensions, the ability to defend democratic values and human rights is integral to social resilience.
Today’s geopolitical instability and the need to safeguard democracy and human rights demand a new relationship between ESG and the defence sector. That is why we are witnessing the early stages of the evolution from ESG to ESSG – Environment, Sustainability, Security, and Governance, positioning security as a pillar of responsible business.
The case for defence in ESG
ESG aims to build resilient societies. Defence underpins that resilience by safeguarding freedoms, protecting human rights and ensuring the rule of law – values that ESG seeks to promote. Without security, sustainability cannot thrive. Encouragingly, investors and policymakers increasingly recognise this interdependence, reframing defence as a cornerstone of social stability.
Today, defence is viewed as a multidimensional effort involving cyber security, resilience against disinformation, and the protection of critical infrastructure. This expanded definition acknowledges that threats to national security are no longer confined to physical borders; they also include digital and societal vulnerabilities that can undermine democratic values and social cohesion.
As such, modern defence strategies must address not only military readiness but also environmental stewardship, ethical conduct and governance standards. This shift reflects the growing recognition that true security requires a holistic approach, integrating environmental, social, and governance principles to safeguard both people and the planet. The inclusion of defence within ESG frameworks demonstrates how security has become inseparable from sustainability in today’s interconnected world. As cyber threats, terrorism, and state aggression escalate, defence capabilities become essential to protect the very freedoms ESG champions.
This reality calls for a broader framework: ESSG – Environment, Sustainability, Security and Governance.
Regulatory gaps and misconceptions
One of the most significant barriers to defence inclusion in ESG frameworks is regulatory ambiguity. Current EU sustainable finance regulations – such as the EU Taxonomy for Sustainable Activities – do not explicitly cover defence. This omission creates uncertainty for investors and financial institutions, leading many to default to exclusion rather than engagement.
Importantly, the exclusion of defence from ESG portfolios is often driven by perception rather than actual ESG standards. Defence companies are frequently assumed to be incompatible with sustainability goals due to ethical concerns, even though many firms maintain robust governance, compliance and human rights due diligence processes.
This disconnect underscores the need for clearer guidance from policymakers and regulators. Without explicit frameworks, financial institutions struggle to reconcile ESG principles with national security imperatives, perpetuating a binary view that is increasingly out of step with geopolitical realities.
Challenges for defence companies
Against this backdrop, defence firms face a number of significant ESG-related hurdles. To begin with, environmental impact should be considered.
Armed forces contribute roughly 5% of global CO₂ emissions, making defence one of the most carbon-intensive sectors due to their extensive operations, energy-intensive equipment and reliance on fossil fuels for transport, logistics and training exercises. Military vehicles, aircraft and naval vessels consume large quantities of fuel, while bases and infrastructure require substantial energy for heating, cooling and power. Reliable data on military emissions is often limited, partly due to national security concerns. This lack of transparency makes it challenging to fully assess the sector’s environmental footprint and integrate it effectively into ESG and ESSG frameworks.
Secondly, defence operates in a high-risk environment for human rights, corruption and political sensitivities. Strong governance and transparency are essential to mitigate reputational and regulatory risks.
When considering ESG criteria in the context of weapons, compliance with international treaties and conventions such as the Convention on Cluster Munitions sets clear boundaries, particularly regarding controversial weapons such as cluster munitions, landmines and chemical or biological arms. These categories are typically excluded from ESG-compliant investments, as their use and production are widely prohibited under international law and carry significant ethical and legal risks.
Furthermore, the risk profile varies substantially depending on whether weapons are sold to state or non-state actors; sales to non-state actors often lack transparency and present greater concerns about ultimate use and potential human rights abuses.
There is also the regulatory complexity in a national security context to consider. ESG disclosure requirements, by their very nature, demand a high degree of transparency and disclosure which can sit uncomfortably alongside the defence sector’s need to protect sensitive information for reasons of national security. Disclosing detailed data on operations, supply chains and environmental impacts may inadvertently expose critical vulnerabilities or strategic capabilities to adversaries, undermining operational effectiveness and potentially putting national interests at risk. At the same time, opaque practices can erode trust with investors and the broader public, who increasingly expect robust ESG reporting across all sectors.
Policy & industry recommendations
To accelerate integration of defence into ESG frameworks, a coordinated and coherent approach is needed. To start, whilst a careful balance must be struck between legitimate demands for disclosure and the imperative to safeguard confidential information, one possible approach is to develop tailored ESG frameworks specifically for the defence industry, allowing for meaningful reporting on sustainability and governance without compromising classified details. This would involve close collaboration between regulators, industry and security agencies to set out clear parameters for what can be disclosed safely, ensuring that the sector remains both accountable and secure.
There is also an argument to clarify sustainable finance rules. Policymakers and regulators should provide greater clarity on how sustainable finance regulations apply to defence investments and financing.
Perhaps, too, we might see improved communication by financial institutions in the shape of banks and asset managers offering ESG products better communicating existing opportunities to invest in defence responsibly, engaging clients, governments, and stakeholders.
The outlook: from ESG to ESSG
Defence and sustainability are interdependent, and companies embracing this reality can lead the way. Integrating defence into ESG is not about lowering ethical standards – it’s about acknowledging global complexity. Democracies cannot flourish without security and human rights cannot be protected without credible defence capabilities. As the world faces new threats, the evolution from ESG to ESSG is both logical and necessary. For defence companies, this is an opportunity to lead – not by rejecting ESG principles, but by redefining them to include the security that makes sustainability possible.