1 Introduction

This Commission Notice provides guidance on how the EU sustainable finance framework and the Corporate Sustainability Due Diligence Directive (CSDDD) apply to the defence sector. It aims to ensure consistent application of sustainability rules, prevent undue discrimination against defence-related activities, and clarify that sustainability disclosures and due diligence obligations apply horizontally across all sectors. The framework does not restrict financing of defence but requires case-by-case assessment based on environmental, social and governance (ESG) risks and impacts.

2 Investing in the defence industry – A contribution to EU resilience and security

The Notice recognises the defence industry as contributing to EU resilience, security, and peace, which are linked to social sustainability objectives and UN Sustainable Development Goal 16. It highlights alignment between EU policy goals and UN frameworks, including the European Climate Law and fundamental human rights instruments. The Commission notes that geopolitical developments, including Russia’s war against Ukraine, underscore the need for defence readiness by 2030 and increased industrial capacity.

2.1 The defence industry contributing to broader EU and UN objectives

The defence sector is framed as supporting security, peace, and institutional stability, which are prerequisites for the realisation of human rights and sustainable development. The Notice emphasises that, where defence activities safeguard peace and security, they may contribute to social sustainability, provided they do not significantly harm other sustainability objectives and follow good governance practices.

2.2 The defence industry in the context of the EU sustainable finance framework and the CSDDD

The Commission clarifies that the sustainable finance framework is fully compatible with defence investment. Regulations such as SFDR, EU Taxonomy, MiFID II, CSRD, BMR, and the CSDDD apply to defence companies like any other sector. No sector-wide exclusions exist, except for additional disclosure requirements related to controversial weapons. Under the CSDDD, downstream activities related to authorised exports of military and dual-use items are excluded from due diligence obligations.

3 Risk mitigation in engagement with the defence industry

Defence activities are subject to extensive EU and international regulation governing production, use, and transfer of military and dual-use items. These controls are presented as key mechanisms for mitigating adverse human rights and security risks and as relevant inputs for sustainability assessments by investors and financial market participants.

3.1 International treaties And EU legislation regulating use and export

Exports and intra-EU transfers of military technology are governed by binding EU rules, including the Common Position on arms exports and export control regimes for dual-use items. Member States assess licences against criteria such as human rights, regional stability, and international treaty obligations. Robust internal compliance systems are required of defence companies and are highlighted as relevant indicators of due diligence quality.

3.2 Risk mitigation in different legislative files of the sustainable finance framework and the CSDDD

3.2.1 SFDR

SFDR requires transparency on sustainability risks and principal adverse impacts. For defence investments, relevant indicators include potential violations of UN Global Compact principles, lack of compliance mechanisms, and exposure to controversial weapons. Only four weapon categories—anti-personnel mines, cluster munitions, biological and chemical weapons—are classified as controversial.

3.2.2 EU Taxonomy

The EU Taxonomy does not exclude defence activities. Defence companies may claim Taxonomy alignment for eligible horizontal activities such as energy-efficient buildings or clean transport, subject to minimum social and governance safeguards and “do no significant harm” requirements.

3.2.3 MiFID II

MiFID II sustainability preferences reference SFDR and the EU Taxonomy. Investments in defence are not presumed to have adverse impacts solely due to sector classification, and products may still meet client sustainability preferences following appropriate assessment.

3.2.4 CSDDD

Large defence companies within scope must conduct human rights and environmental due diligence across their value chains. Recent amendments delay application until 2028, reducing immediate regulatory burden while maintaining core obligations.

3.2.5 CSRD

CSRD introduces mandatory sustainability reporting standards, allowing omission of classified or sensitive information. This flexibility is particularly relevant for defence companies.

3.2.6 BMR

Benchmark exclusions apply only to companies involved in prohibited weapons, reinforcing the targeted nature of restrictions.

4 Revenue thresholds

The framework sets no turnover-based thresholds for excluding defence activities. Generalised exclusions are discouraged, particularly as they may disproportionately affect specialised small and medium-sized enterprises.

5 Assessing the defence sector’s contribution to social sustainability

The Commission encourages investors and regulators not to treat defence as inherently non-contributing to social objectives. Contributions should be assessed case by case, considering governance standards, risk mitigation, and alignment with peace and security outcomes.