Geopolitics and ESG: A Wake-Up Call for European Asset Managers to Rethink Priorities
Updated:
13 MAR, 2025
The geopolitical landscape in Europe has dramatically shifted, compelling European asset managers to reevaluate their investment priorities. As Russia's invasion of Ukraine exposes deep vulnerabilities—from military dependencies to energy reliance—traditional ESG (Environmental, Social, and Governance) principles are increasingly challenged. In Geopolitics and ESG: A Wake-Up Call for European Asset Managers to Rethink Priorities, David Lagrange explores why the defence and nuclear sectors, despite being critical to Europe's security and sustainability, remain controversial under ESG standards. As Europe grapples with newfound urgency for rearmament and energy independence, this article makes a compelling case for a pragmatic overhaul of ESG frameworks to align investment strategies with geopolitical realities.
By: David Lagrange
Geopolitical dark clouds looming over Europe
Russia’s invasion of Ukraine brought back conventional war on the European continent, stepping-up existential threat to Western democracies. and exposing Europeans’ fundamental weaknesses: its military limitations and energy dependence, reliant on both US military protection and Russian gaz.
After more than 30 years of military budget reduction, relying on US military protection through NATO, European governments now realize that the Trump administration is even less reliable than expected. The sudden US decision to halt all weapon shipments and intelligence support to Ukraine triggered a sense of betrayal. Urgency for rearmament is surging across European capitals, accelerating military cooperation between European partners.
Europeans must fund this defence effort—both to support Ukraine immediately and, in the medium term, to expand their military capabilities and restructure defence cooperation. With record-high debt, European governments are looking for ways to finance rearmament and bolster their conventional forces. The nuclear arsenals of France and the UK provide a strategic shield and some time to achieve this goal. With the UK still technically reliant on the U.S.—and therefore vulnerable to a non-cooperative administration—France remains the only fully independent nuclear power with a distinctly European strategic focus. Growing distrust in the U.S. as an ally, and in the availability of its military equipment, will push European armies toward regional manufacturers.
The shift began in 2024, with Europe sourcing 50% of its weapons from the U.S., down from over 60% the previous year.
Energy is the other critical challenge. Alternatives to Russian gas largely come from autocratic regimes still within Russia’s sphere of influence, and particularly hostile to France, a major decision-maker in the EU—Azerbaijan, Iran, and Algeria. Turkey is another supplier but could exploit its leverage, using energy as a tool for blackmail. Meanwhile, liquefied gas from the U.S. is costly, and Washington is no longer the reliable partner it once was.
Renewable energy cannot produce sufficient output, and its key components—solar panels and wind turbines—are predominantly supplied by China, another aggressive, imperialistic power. This leaves Europe with nuclear energy as the only viable option: a locally produced, fully controllable power source capable of meeting demand.
The defence and nuclear sectors present vast investment opportunities with growth potential, beyond this they are existential priorities requiring urgent funding. Defence will expand rapidly, fuelled by massive public spending. STOXX® Europe Total Market Aerospace & Defense gained 29% YTD. Meanwhile, nuclear energy remains the cheapest and most self-sufficient power source, playing a crucial role in the transition from fossil fuels to renewables.
The paradox of two critical sectors among ESG investment controversies
Despite geopolitical shifts becoming increasingly evident over the past decade—and even more serious in the last three years—most asset managers still exclude the defence and nuclear sectors from their investment universe. According to a survey* published in late 2024, only one asset manager includes these sectors in its portfolios, while only a handful have begun reconsidering their stance.
Why are these two sectors still considered controversial under ESG standards? The current geopolitical landscape challenges these principles, making it essential to reassess ESG practices. The ethical debate should not focus on weapon production itself but rather on how and for what purpose they are used. Moreover, what expertise do ESG teams have to make informed assessments on such complex issues?
The defence sector should be viewed through Reagan’s doctrine of "Peace through Strength." Does a defence system exist to protect its people, democracy, liberal values, and human rights from potential aggressors? Democracies need weapons—not to wage war, but to deter and counter hostile autocratic regimes.
History provides clear examples of this principle. During World War II, the U.S. became the “arsenal of democracy”, equipping Allied forces to defeat Nazi Germany and the Nippon Empire, ultimately ending their atrocities in Europe and Asia. Decades later, the Soviet Union and the Communist Bloc—with appalling records on human rights and the environment—collapsed not because of moral arguments or ESG principles, but largely due to the "Star Wars" program, which forced them into an arms race they couldn’t sustain.
Investing in defence to project deterrence is far more effective than using weapons in active warfare. In this regard, the nuclear bomb is the ultimate deterrent—a "Leviathan" meant not for use, but to prevent war altogether. It eliminates the need to send troops into combat, reducing both military and civilian casualties. Had Ukrainians retained their nuclear arsenal instead of surrendering it under the 1994 Budapest Memorandum, Russia would never have dared to invade. Ironically, this reality contradicts non-proliferation treaties, which ESG standards typically follow. (See Chris LeBlanc’s Tribune for further analysis.**)
Nuclear power is also essential for civilian purposes—both economic and environmental. For years, many Europeans relied on Russian gas, despite repeated warnings. Over the past decade, Russia weaponized its energy supply, cutting off gas to pressure Ukraine—an act that also had consequences for several European nations. Ensuring Europe's energy independence is now critical, and nuclear energy remains the most reliable option to provide long-term, large-scale power. France launched its civilian nuclear program, the Messmer Plan, in 1974. By the 1980s, the country achieved energy self-sufficiency and reduced carbon emissions by 80%. In contrast, Germany abandoned its nuclear program in 2011. Although renewables have become its primary energy source, Germany was forced to reopen coal-fired power plants to compensate for supply gaps, leading to increased CO2 emissions. A nuclear-based energy mix offers a more efficient and cost-effective transition with environmental benefits to renewables. So why does nuclear energy remain an “ESG controversy”?
Revisiting ESG: A Critical Moment for Reevaluation
The national interest of Western European countries, driven by the current geopolitical situation, calls for a reform of ESG practices. ESG must become more pragmatic, as it was too often implemented during the 2017 ESG wave for reputational risk mitigation and marketing opportunities rather than a genuine belief in its principles.
This opened the door to political hijacking based on ideology, leading to the oversimplification of the E (mainly focused on renewable energy) and the reduction of S to DEI (Diversity, Equity, and Inclusion). In the U.S., ESG became politically associated with "wokeism,".
The moralistic ideology that tainted areas of ESG failed to prevent asset managers from investing in Russia since 2014. The wider adoption of ESG a few years later missed the opportunity to correct this oversight. In 2022, $107 billion was lost during corporate exodus from Russia. Western investors found themselves trapped when the Moscow Stock Exchange closed and later reopened, excluding foreign investors from selling their Russian equities. How many companies still operating in Russia remain in portfolios today? What effective engagement have been undertaken by ESG teams—are they in a position to do any? Asset managers must define where and when they cannot make sustainable investments or apply ESG principles more consistently and be transparent about their limitations.
Fund Selectors, Asset Owners, and Politicians scrutiny to align Investment Priorities with Geo-Political Realities
It took years, even decades, for ESG to be fully embraced by asset managers. It is highly likely that asset owners and fund selectors will need to drive this mindset shift, integrating the defence and nuclear sectors as core investment priorities. These sectors should be regarded as general interest priorities by investors. Fund selectors must challenge any resistance to including these sectors in investment portfolios. Governments now consider them critical, if not existential, which will push asset managers to adapt their approach. The shift has already begun. On March 20th, the French Minister of the Economy will convene financial institutions to mobilize retail savings for defence financing. The EU Commission could extend this initiative across the continent, aiming to engage 500 million retail savers to reach an €800 billion defence budget at the EU level.
Beyond mobilizing savings, managers must actively promote defence financing, as military strategists know that one pillar of victory is winning the "hearts and minds" of the population. In the information war fought over the internet in individualistic, consumer-driven societies, it is crucial to capture people's attention and reset their priorities. Asset managers must now position defence and nuclear sectors as "positive" investments, after years of “discrimination”.
Geopolitics has become a top concern for pension funds, and being an active participant in geopolitical efforts can only enhance the credibility of a brand. It also presents a valuable opportunity to engage retail investors, a segment that has gained growing importance, as managers have traditionally focused on B2B and fund distributors. The post-Covid ETF boom has opened the door for direct selling of funds to retail investors through fintech, a market that managers have yet to fully conquer and incorporate into their marketing strategies.
Supporting national efforts by encouraging investments in the defence and nuclear industries, or obstructing this progress by excluding these investments? Ultimately, asset managers don’t have much choice: this is a critical priority that must take precedence over all other considerations. European asset managers have a unique opportunity to take the lead in this area, potentially reclaiming market share lost to their U.S. counterparts.
Sources
* Funds Europe AM Carbon Impact Europe Oct 24
** https://chrisleblanctribun.wixsite.com/clbt/post/what-if-the-west-gave-back-the-nuclear-weapon-to-ukraine
