Luxembourg is preparing to create a new category of sovereign assets: defence bonds. Published at the beginning of October, the Defence Bond Framework provides a framework for the issue of bonds intended exclusively to finance national and European defence projects. This is a first in Europe, both in regulatory and symbolic terms, and could inspire other States faced with the rising budgetary demands of Nato and the European Union.

This approach is in line with the need to increase defence spending to 5% of gross national income by 2035, after 1% in 2028 and 2% in 2030. The new course reflects the commitment made at the Nato summit in The Hague in June 2025 to reach 5% of GDP in security investment within ten years.

For a country with triple-A sovereignty, which is home to the world’s second-largest centre of investment funds (nearly €5,900 billion in assets), this rise in power logically involves the capital markets. This is not the first time that Luxembourg has positioned itself as a pioneer in public finance. In 2014, it issued the first sovereign Sukuk in euros, opening up the Islamic market to the eurozone. In 2020, it launched its Sustainability Bond, one of the first sustainable sovereign bonds in Europe. Then, in 2025, the country broke new ground again with the Digital Treasury Certificate, one of the first all-digital sovereign debt securities.

The Defence Bond Framework is clearly part of this line of sovereign innovation. It is based on five pillars: the use of funds, the selection process, product management, reporting and review. The sums raised will be allocated exclusively to eligible expenditure: infrastructure modernisation, secure communications, military vehicles, air and space capabilities, building up strategic stocks and, above all, research and innovation in dual technologies. Conversely, the framework excludes any funding for controversial weapons, programmes prohibited by international law or exports outside the EU, Nato or Ukraine.

Governance at the heart of the framework

A Defence Bond Committee, chaired by the State Treasury and comprising Defence, Finance, the Ministry of State and the Inspectorate of Finance, will oversee the selection of projects and the allocation of funds. An allocation report will be published annually, in the manner of green bonds, guaranteeing the traceability of the sums raised.

Proceeds not yet allocated will be temporarily invested in liquid and secure instruments, in line with public treasury management practices. While Luxembourg has not requested a second party opinion for reasons of national security, external control will be carried out by the Court of Auditors, which will be responsible for verifying the consistency between the amounts raised and the expenditure incurred. This is a form of institutional transparency, suited to a sector where confidentiality is the rule.

The framework does not mention ESG or sustainability in the strict sense. But its architecture – rigorous governance, sector exclusions, reporting requirements – is very similar to the structure of green and social bonds. This convergence is not claimed by the government, but it does in fact reflect a desire to give credibility to defence funding through mechanisms inspired by the most demanding financial transparency standards.

In a broader reading, this Defence Bond Framework is part of an emerging movement: that of public finance for resilience, where security is seen as a prerequisite for sustainability. Without claiming to officially broaden the ESG perimeter, Luxembourg is introducing a new idea into the financial sphere: stability, security and strategic autonomy can also be financed responsibly.

The projects supported must, according to the text, produce positive economic and societal spin-offs in Luxembourg – employment, industrial innovation, spatial development – all elements that already fall under the “S” pillar of sustainability, without naming it as such.

By linking defence, sovereignty and innovation, the country is therefore betting on consistency between security strategy and financial credibility. The inaugural issue of the Defence Bond, expected in the first quarter of 2026, should be modest in volume but strong in political signal: that of a State that chooses to apply the same discipline, transparency and governance requirements to defence spending as it does to sustainable bonds.

Without seeking to “green” defence, Luxembourg is making it an object of responsible financing – a European first, destined to open up a wider debate on the place of security in sustainability.