ESG investing isn’t anything new, but it has undergone some evolution. What started a few decades ago as a somewhat basic ethical assessment of business activity has matured into a more thorough integration of environmental, social and governance factors through quantitative and qualitative assessments.

According to a PwC report, the value of ESG investing is set to soar to $33.9 trillion (€30.8 trillion) in 2026, making up 21.5 per cent of assets under management globally. Yet the ESG landscape has also seen controversy, with investors doubting the accuracy of ESG ratings and criticising the perceived hypocrisy of some higher-scoring companies. Some big investors in ESG funds are also involved in high-emissions companies, raising questions about their credibility and commitment to sustainability. MSCI recently downgraded hundreds of ESG funds, with hundreds more to be stripped of their ESG ratings.

Meanwhile, the two most pressing geopolitical issues are Russia’s offensive against Ukraine and escalating tensions between China and the West. Neither is an insubstantial conflict, and they could reshape the face of the planet, which is why defensive stocks are performing well.

Defence companies have long been a no-no for full-on ESG funds. It is even hard for funds with a bit of an ESG overlay. After all, jets and tanks have something of a significant carbon footprint — and anything designed to frighten, and kill is rarely classified as a good thing.

But maybe it isn’t so simple.

If you supply weapons to the invaded underdog in an unprovoked fight, or for the countries backing said underdog to pass along, could we not file your activity under S as a social good?

As Artis Pabriks, the Latvian defence minister said last year: “Is national defence not ethical?” Or if you prefer, in the words of Col. Jessup “we live in a world that has walls, and those walls need to be guarded by men with guns.”

Total global military expenditure grew by 3.7 per cent in real terms last year while military expenditure in Europe saw its steepest year-on-year increase in at least three decades. The three heaviest spenders last year—the United States, China and Russia—made up 56 per cent of the global total, according to new data on global military spending published by the Stockholm International Peace Research Institute (SIPRI).

The United States remains by far the world’s biggest military spender. US military spending reached $877 billion in 2022, representing 39 per cent of total global military spending and three times the amount spent by China, the world’s second largest spender. Lockheed Martin is the world’s biggest company in the sector. Renowned for leading fighter jets like the F-35A, it generated about $66 billion in sales last year.

The U.S. and its allies have 3,100 F-35s on order through to 2035, making Lockheed one of the best defence stocks for steady, long-term revenue. The current dividend yield is around 2.6%. Boeing is known for its gigantic commercial airline business, but a large part of the company is dedicated to defence thanks to its aircraft and helicopter production for the Pentagon. Known for its systems and technological capabilities, Boeing is a key partner to international governments.

General Dynamics is one of two primary military shipbuilders and has a portfolio of tanks and land vehicles that makes it one of the go-to vendors for the U.S. Army. It also has one of the largest defence-focused IT and services businesses, giving it some revenue stability at times when the Pentagon cuts back on equipment purchases. The current yield is around 2.4%. BAE Systems, founded in 1999 by British Aerospace’s takeover of Marconi Electronics Systems, employs about 93,000 people across over 40 countries, providing defence, aerospace and security solutions worldwide.

BAE Systems has secured new orders for the supply of munitions to the British Ministry of Defence worth £280m (€324 million), with options to rise to more than £400m. The stock yields about 2.8 per cent. Exchange-traded funds (ETFs) with exposure to the sector include the iShares U.S. Aerospace & Defence ETF which has grown 4.8 per cent this year, while the Invesco Aerospace & Defence ETF has seen a decent 9.2 per cent rise since the start of the year.

All of the above are good starting points for would-be defence sector investors, and a diversified mix of stocks and ETFs is always advisable to ensure your portfolio isn’t too reliant on one company.