The German sustainable fund landscape has undergone a pivotal transformation in the first half of 2025, as managers recalibrate ESG mandates to accommodate defence sector investments against a backdrop of heightened geopolitical instability.
After regulatory adjustments in December 2024, sustainable funds governed by the Sustainable Finance Disclosure Regulation (SFDR) now allow a broader – though still selective – exposure to defence companies, a move reshaping portfolios and sparking debate in institutional circles, according to BVI, the German Investment Funds Association.
Until recently, German funds with sustainability features routinely barred companies deriving over 10% of revenues from military hardware. New guidelines now only exclude firms manufacturing weapons banned under international law.
As a result, managers and investors enjoy greater discretion. Some providers, particularly those with church affiliations, maintain a blanket exclusion, while others permit limited exposure up to 10% revenue share or, in some cases, forgo exclusions entirely for select products, BVI stated in its most recent Snapshot Sustainability report.
Portfolio data as of June 2025 reveal the early impact: Article 8 SFDR-compliant funds’ average asset-weighted allocation to aerospace and defence stocks jumped from 0.8% at the end of 2024 to 1.3% at mid-year.
The report also disclosed that funds with a specific German focus showed the most pronounced change, with names like Airbus and Rheinmetall now accounting for a 4.6% portfolio share in relevant products. Article 9 funds, previously devoid of defence exposure, have posted their first measurable allocation (0.2%).
Nevertheless, ESG-labelled portfolios still lag their conventional Article 6 peers, which average 3.6% exposure to the sector, according to BVI’s research.
Article 8/9 funds
Notably, Article 8/9 funds marketed elsewhere in Europe outpace their German counterparts, recording nearly 2% exposure to defence as of Q1 2025. The trend is clear, and BVI expects continued growth of defence holdings in ESG-labelled strategies over the coming year.
Assets under management across Article 8 and 9 SFDR funds in Germany climbed past €1.2trn as of June 2025. This robust growth – concentrated in Spezialfonds used by institutions – reflects major retrospective reclassifications rather than outright new inflows.
Spezialfonds with sustainability features now manage over €460bn for clients, outpacing retail funds whose sustainable-asset volumes slipped to just under €750bn, the report said.
Despite asset growth, new business for ESG funds remains challenging, particularly among private investors, said BVI.
The first half of 2025 saw net outflows of €1.3bn from sustainability-themed retail products, contrasting with almost €50bn in net inflows for conventional retail funds. In institutional markets, Spezialfonds investors added more than three times as much fresh capital to Article 6 as to Article 8/9 vehicles.
As institutional allocators and fund managers navigate shifting ESG norms and regulatory realities, BVI believes the recalibration of sustainable strategies to accommodate defence exposure signals a nuanced, pragmatic response to the rapidly evolving European security landscape.
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