Sustainability
Diya Iyer
Investment and Sustainability Analyst
Watts and weapons in sustainable finance
A series of recent geopolitical shocks has brought two key issues sharply into focus-energy security, particularly nuclear energy and national security. Both of which have been central to the recent geopolitical events, namely, the Russian invasion of Ukraine and more recently the Iran conflict and the associated disruption in the Strait of Hormuz.
Such events have historically caused widespread concern and disruption. The current conflict in the Middle East, which has lead to the blockade of the Strait of Hormuz, is believed to represent one of the largest supply disruptions in the global oil market. “More serious than the ones in 1973, 1979 and 2022 together” said Fatih Birol, Head of the International Energy Agency (IEA).
Focusing on the EU, its reliance on the Russian energy imports were highlighted during Russia’s invasion of Ukraine in 2022, which sent natural gas and oil prices soaring and in turn rippled through households, businesses and national economics, the effects of which were made even more painful as the region was emerging from the aftermath of COVID-19. Apart from the conflict in the Middle East, the headlines have also been ‘trumped’ with rising tensions around defence spending in the EU since the start of President Trump’s second term with a focus on Europe’s NATO commitments and defence spending.
At a high level, energy security, particularly nuclear energy and defence, appear to be out of the sustainable finance sphere within the European Union but this isn’t the reality. Its importance has been underpinned with a firm move towards regulatory clarity, and support, as an outcome not limiting investments in it. Energy and national security are key in reshaping Europe’s long term strategic and sustainable future.
Power play
“This is a war on our energy, a war on our economy, a war on our values, and a war on our future,” said European Commission President Ursula von der Leyen in 2022, after Russia’s invasion of Ukraine, signalling a requirement to pivot to strengthening Europe’s energy independence.
Whilst the EU is often criticised for its slow pace and indecisiveness, the bloc moved swiftly in scaling renewable power and reducing its dependence of Russian energy imports. Since 2022, the EU has:
- Added 406 gigawatts (GW) of solar capacity,
- Expanded wind power to 234 GW, and
- Brought renewables to just over 47% of its electricity mix.
However, in reducing its reliance on Russia, the EU’s imports of liquified natural gas (LNG) have shifted heavily towards the United States. The table below shows EU’s Liquefied Natural Gas (LNG import mix from the United States against that of Russia and we can see the surge in the imports since 2022.
Figure 1: EU’s liquified natural gas import mix from US & Russia between H2 2021 and H1 2025
Source: ieefa.org, Kpler, accessed March 2026.
This shift in Europe’s LNG dependency from Russia to the United States still poses questions for Europe’s long term strategic positioning and its ability to influence geopolitical outcomes, which are especially highlighted in the current world.
Despite the challenges, there have been notable positives, clean-energy investments have climbed in the past decade globally, reflecting the influence of recent geopolitical shocks and their economic impact which have pushed countries to accelerate their energy-transition strategies.
Figure 2 below shows the increase in clean energy investments from 2019 into 2024. Within the European Union, this momentum has been especially pronounced with regulatory support, ambitious net zero targets and the energy prices. Over the 5-year period between the clean energy investments in the EU has risen significantly, highlighting the mobilising of capital.
Figure 2: Annual investment in clean energy, 2019 and 2024 by China, US and EU (Billions, US dollars)
Source: iea.org as at May 2024.
What sets the recent situation apart from the earlier sagas of national and energy security, like the first gulf war in 1990, is the substantial advancements in renewable energy technologies and the investment landscape. For instance, there was no existence of dedicated clean energy index at that time and the broader investment theme was in its nascent stages, whereas now it has developed into a viable theme with credible investment areas attracting significant flows.
As there is a race to meet its significant energy demands especially in the world of artificial intelligence (AI) and data centres, there has been an increase in dialogue around nuclear energy. At policy level, the European Union has become far more receptive to nuclear energy. One major regulatory milestone was the EU General Court’s decision to uphold European commission’s decision to classify nuclear energy as a taxonomy-eligible activity, confirming that it can be considered a sustainable investment when it meets the strict technical screening criteria. The view states nuclear power offers near zero greenhouse gas emissions and there are currently no comparably scalable low carbon alternatives capable of delivering continuous, reliable supply at the levels required. This ruling effectively removed years of legal uncertainty and opened the door for nuclear projects to attract sustainable finance capital. The judgment also affirmed that the Commission had sufficiently accounted for operational risks, reactor safety considerations, and radioactive waste concerns, meaning nuclear can be treated as a transitional activity within the EU’s climate mitigation pathway. Nuclear energy might not be a solution in the short term given the constraints around the longer timeline from planning to operation but in the long term it serves a significant role.
More broadly, the EU taxonomy’s recognition of nuclear and the additional clarification issued through the court’s decision signals a shift toward a more pragmatic view of Europe’s energy transition and security. Recent policy momentum reinforces this trajectory on 19th March 2026, the EU announced a €330 million investment aimed at accelerating fusion energy development and building nuclear technology skills, underscoring how central the sector has become to the region’s long-term strategy. The key question that remains now is scale. If nuclear is to play the role envisioned supporting clean baseload power, underpinning the power-hungry digital economy and establishing energy independence substantial capital investment will be needed.
Environmental, social, security and governance?
A growing focus on defence has emerged alongside Europe’s energy security concerns, making it a pillar of strategic resilience. Following, President Trump’s criticism to the bloc’s lack of defence spending in the context of its NATO commitments. This renewed urgency has also been reflected in financial markets. Along with the regulatory support from objectives of European defence industrial strategy and the white paper for European Defence Readiness 2030 the path is aimed at recognising the relationship between social sustainability and the defence industry. The proliferation of European defence-themed Exchange Traded Fund (ETFs) has broadened this investment universe and made it prominent. The graph below displays the flows into the top five European defence ETF’s by assets under management.
Figure 3: Flows into the top 5 European Defence ETFs by AUM (Millions, US dollar)
Source: Bloomberg, as at 27th February 2026.
From a sustainable finance perspective, Europe’s stance on defence has evolved in a pragmatic direction. Historically, sustainable finance frameworks have been cautious about the defence sector, particularly regarding weapons manufacturing. EU regulation now makes a clear distinction between standard defence activities, which can be permissible investments, and controversial weapons, such as cluster munitions, landmines, or chemical and biological weapons, which are subject to additional disclosures, exclusions and typically prohibited for Environmental, Social, Governance (ESG) labelled products. Importantly, the definition of controversial weapons listed in the Sustainable Finance Disclosure Regulation (SFDR) does not include nuclear weapons.
This distinction allows for defence related companies to be viable investments and not impose any limitations on the financing of the defence sector where they support democratic security, crisis response, and peacekeeping, while maintaining exclusions for weapons that violate international humanitarian norms. The EU’s broader sustainable finance architecture has been shifting towards understanding security as a requisite for sustainable development. As geopolitical tensions rose sharply after 2022, many European policymakers argued that defence capability is not incompatible with sustainability indeed, without security, long-term climate and social objectives cannot be achieved.
Overall, Europe’s rising defence orientation, intensified NATO burden sharing pressures under Trump, the upward trajectory of defence-related equities, and evolving EU sustainable finance regulation all signal toward a significant reshaping of the investment landscape. Within this context, EU defence is not viewed as a peripheral or ‘non ESG’ sector, but rather as an essential component of contribution to resilience, security and enhancing social sustainability.
The new European equation
Energy security and defence have long been intertwined, with geopolitical shocks consistently revealing how vulnerabilities in one domain can destabilise the other. Recent events, from the Russia Ukraine conflict to the Middle East strikes targeting oil and pipeline infrastructure show how national security crises rapidly spill into the energy sphere. For the EU, these dual pressures have accelerated a strategic shift, with increased investments into securing energy security while aiming to provide viable regulatory support to direct investments towards defence industry under the sustainable finance framework.
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Warning: Past performance is not a reliable guide to future performance.
