Investing in defense: only with the right safeguards

Pension fund PME is investing €40 million in a European defense fund.¹ The amount is modest relative to the total portfolio, but the symbolic value is enormous. For the first time in decades, a major Dutch pension fund is breaking the taboo on defense investments. Not because moral objections have disappeared, but because geopolitical reality no longer allows for detachment. What PME is doing is no longer an exception. European pension funds and institutional investors are massively reconsidering their position on defense. The Russian invasion of Ukraine has brought about a fundamental shift in thinking about security, resilience, and what socially responsible investing means in this context. Where financial institutions avoided the defense industry for years due to reputational risks, pressure is now growing to make capital available for European defense capacity. The question is: how do you do that without introducing new risks?

The reluctance to invest in defense had good grounds. Financial institutions could not guarantee where their capital would ultimately end up. An investment in a drone manufacturer could lead through detours to deliveries to regimes with human rights violations. Components for military vehicles could surface in conflict zones where international law is being violated. Dual-use technology, originally developed for civilian applications, could be deployed for offensive military operations. The lack of transparency in the supply chain made it impossible for investors to verify end use.

That uncertainty had direct consequences. Institutional investors such as pension funds operate under strict ESG criteria and must be accountable to their participants. Investing in defense without clear guarantees about final destination was a reputational risk few wanted to take.

The paradox is that Europe is now calling on the private sector to invest in an industry that has been depleted for decades by government policy. After the Cold War, European governments structurally cut back on defense spending. The NATO target of 2% GDP was widely ignored, and orders dried up. While the US and Asian countries maintained their defense spending, European production capacities deteriorated. Private investors simply followed the market: without government demand, no business case. The result: dependence on external suppliers and a lack of strategic autonomy. Now that Europe is forced to rearm, the industrial capacity to scale up quickly is absent. Pension funds are being called upon to bridge that gap, without answering the question: how do you invest responsibly in a sector where supply chain transparency is complex and end-use is difficult to control?

PME is the first, but not the last. Other major Dutch pension funds are exploring similar steps. ABP, the Netherlands' largest pension fund with assets of €532 billion as of September 2025,² has indicated its willingness to invest significantly once responsible investment opportunities are available.³

The potential capital flow is substantial. If ABP were to allocate a similar percentage as PME (approximately 0.2% of the portfolio), it would amount to over €1 billion. At a higher allocation of 1%, that rises to €5.3 billion. This makes the movement more than a symbolic gesture. It is a strategic reallocation of institutional portfolios with direct impact on the Dutch and European defense industry.

But that impact works both ways. If the first investments prove successful, other institutions will follow quickly. A positive precedent opens the door for structural refinancing of the European defense industry. If things go wrong because investments end up at companies with unclear ownership structures, inadequate export controls, or deliveries to problematic end users, sentiment will shift. A single incident can set the sector back for years.

The due diligence requirements are therefore different from regular investments. Investors want insight into the complete supply chain: where do components come from, which companies produce parts, through which distribution channels do products reach the end user? With dual-use technology it becomes even more complex. Batteries for drones can have civilian applications, but also military ones. How do you verify that products are not resold to conflict zones?

Ownership structures also require extra attention. Russian or Chinese interests through Ultimate Beneficial Owners can be hidden in investment vehicles. Export controls must be verified: do companies comply with international regulations on arms exports? Do they have processes to prevent their products from ending up in the wrong hands through intermediaries? These are not theoretical questions. Dutch companies supplying components to Ukraine are targets of Russian cyberattacks.⁴

The solution lies not in more capital without safeguards, but in better instruments for responsible investing. That requires three steps:

Step 1: thorough screening of investment targets. Not just the financials and governance, but specifically the defense-related risks. Where are dual-use applications? What are the export destinations? Who is in the ownership structure?

Step 2: build and maintain supply chain transparency.Making an investment is one moment, but the supply chain changes constantly. New suppliers join, distribution channels are reorganized, and end users change. Without ongoing due diligence on the chain, suppliers and end users, visibility fades quickly and risks can increase. Continuous monitoring is necessary to ensure that investments continue to meet established criteria.

Step 3: formulate and enforce clear exclusion criteria.Which countries are excluded as final destinations? Which regimes are not eligible? At which human rights situations do you draw the line? These criteria must be established in advance and applied consistently. That requires not only policy, but also the capacity to verify compliance. Geopolitical risk analysis helps organizations anticipate changing threats and adjust their criteria when the situation requires.

Proximities supports financial institutions with investment due diligence and geopolitical risk analysis that answer these questions before capital is committed, and provides supply chain intelligence and monitoring that gives organizations insight into changes in the chain and signals when risks are increasing.

PME's investment marks not the end of a discussion, but the beginning of a new phase. The question is no longer whether institutional investors invest in defense, but under what conditions that can be done responsibly. The capital is available, the willingness is there, but the instruments to guarantee transparency and verifiability must still be deployed at scale.

In a sector where end use is difficult to control and geopolitical relationships shift rapidly, transparency is not a nice-to-have but an absolute prerequisite. Parties that want to benefit from early mover advantages must do their homework first. Only then does responsible investing in defense become truly responsible.

¹ PME Pensioenfonds, 'PME belegt €40 miljoen in Europese hightech defensie-startups', October 16, 2025.

² ABP, Kwartaalbericht Q3 2025, October 23, 2025.

³ BNR Nieuwsradio, 'Pensioenfondsen investeren komende jaren grote bedragen in defensie', March 30, 2025.

⁴ MIVD, Jaarverslag 2024: Russische cyberaanvallen op Nederlandse infrastructuur; Computable, 'Zo sluipt oorlog in Oekraïne onze ict-systemen binnen', September 26, 2024.