Sustainability insight | 10 Jul 2026 |

Travers Smith's Sustainability Insights: Defence needs capital – and clarity

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KEY INSIGHTS

Sustainability issues are manageable: Policymakers and industry initiatives are clearing sustainability hurdles, but – although vital – these are usually not the main obstacle to defence investment in Europe.

Due diligence challenges remain: Human rights and end-use risks cannot be fully eliminated, and governments and investors need to work hard to manage them.

Commercial hurdles persist: The real barriers are commercial: for example, slow procurement, unclear demand signals, and lack of long-term contracts.

A regular briefing for the alternative asset management industry.

As Europe scales up its capabilities, defence investment is an increasingly important theme for alternative asset managers. Policymakers want private capital and are keen to make investments commercially viable. Industry initiatives are helping asset managers to get comfortable with reputational and ethical issues. But challenges remain, and there is more to do.

To be clear: sustainability regulation is not – and never has been – the issue. The European Commission and the UK's FCA have been keen to stress that their sustainability rules do not impose meaningful constraints. Some clarifications – such as the Commission's updated list of “prohibited weapons" – were needed, but these were the easy wins.

Of course, the environmental and human rights issues associated with defence and dual use investments cannot be wished away. Many LPs have long imposed their own restrictions on GPs – and firms that are committed to follow international standards on human rights need to have robust safeguards in place. Two important industry initiatives should help on both counts.

First, at the end of last month, Invest Europe published model Limited Partnership Agreement (LPA) language on defence and dual-use investment. The aim is to allow LPs to impose sensible guardrails, without being too restrictive. The language also attempts to bring some consistency to the restrictions, making them easier for a GP to navigate.

The suggested clause – which Travers Smith helped to draft – confirms that investments in companies involved with a narrow and well-defined list of prohibited activities are not permitted. Beyond that, though, other defence and dual use investments are expressly allowed – if the investee is in a "friendly" country, if the fund manager checks compliance with export restrictions and foreign direct investment rules and, importantly, if the GP makes efforts to ensure that the company "maintains policies and procedures reasonably designed to identify and manage material human rights risks". The GP must "have regard" to the UN Guiding Principles on Business and Human Rights. (These rules resemble, although they are not identical to, the due diligence needed to classify an investment as "sustainable" under the EU's SFDR framework.)

"Human rights due diligence on a defence company is not straightforward – but is crucial"

This model language is welcome but is not a free pass. Human rights due diligence on a defence company is not straightforward – but is crucial. It is easy to defend financing a technology that will keep citizens safe; but no-one wants to fund one that ends up in enemy hands, or is used to inflict indiscriminate harms in breach of international law. The issue is that the risk of the latter can never be entirely eliminated. And, while international standards require you to identify and manage downstream risks, they don’t tell you how to do it. End-use transparency is often limited and ESG data providers provide only partial support, focused on supply chains and controversies, rather than end use where the bulk of the risk lies.

That's why the second industry-led project – the ongoing Guidance for Responsible Investment in Defence initiative (GRID) – is also important. Designed by investors for investors, this month will see consultation on draft guidance that should help public and private markets investors put in place pre-investment and ongoing engagement systems that work for them. (Travers Smith is on the working group for the GRID initiative and the UK in-person consultations will be held at our office in London – let us know if you would like more information.)

GRID will support, rather than dictate. It should help investors classify products, assess end-use risk, and spot risks of downstream diversion. It makes clear what a defence company can do to reassure investors and facilitate investment.

These initiatives are necessary and important, but commercial barriers are the main obstacle. As Kerry Baldwin, co-chair of the Ministry of Defence’s Defence Investors Advisory Group, put it plainly at Travers Smith’s Alternative Insights Summit in London last month: GPs need stronger demand signals, predictable procurement processes, and longer-term contracts. RUSI made the same points in a report published last week. Investors need more clarity about what government will buy, and when.

The EU's "Defence Readiness" package is actively tackling many of these barriers, and this week's news that the German government is tapping the debt markets to boost defence spending will also help.

That is also why the publication of the UK's Defence Investment Plan (DIP) at the end of June was important, if a little underwhelming. Long overdue – and, for many commentators, insufficient – it was nevertheless a step in the right direction. The UK has committed £298bn over four years, treating defence as crucial national infrastructure. Most significantly, it has a strong focus on bringing private sector capital into the sector. (Read our views on the DIP here.)

So, the sustainability clarifications and industry guidance are welcome. But European governments – most recently in the UK – are working to clear the real obstacle: to make defence investments commercially attractive. Progress on that is slower than investors would like, but there are some very positive signs.

As importantly, governments need to lead the national conversation, explaining to investors why they must find solutions to the clear sustainability challenges associated with defence – and recognise that not all risks can be eliminated.

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