Sustainability investors eye defense stocks as geopolitical tensions rise

On both sides of the Atlantic, companies and governments are recalibrating arguments for investing in renewables, minerals and clean technologies. Traditionally, the reason has been to decarbonize and reduce the effects of climate change, but now some are putting the focus on ensuring a supply of minerals to support weapons manufacturing and critical infrastructure in ways that can hopefully boost national security and deter global conflicts.

Consider rare-earth miners. Companies that once pitched themselves as suppliers of metals and minerals for wind turbines and electric vehicles are now seen as vital for the defense sector, providing material used in F35 jet fighters and missile technology.

Phoenix Tailings, a rare-earth mining and processing startup based in Woburn, Mass., said it is seeing demand from the defense industry as well as the electric-vehicle market.

“Whether it’s electric vehicles, wind turbines or next-generation defense systems, rare-earth elements are fundamental to the technologies that power our economy and national security," said Nicholas Myers, the company’s chief executive.

China’s latest restrictions on rare-earth exports, coupled with intensifying geopolitical tensions, reinforce the risk exposure facing manufacturers, investors, and policymakers, Myers said. “Supply-chain resilience is no longer optional—it’s a prerequisite for industrial competitiveness in the 21st century," he said.

In the past, the sustainability and defense industries were considered incompatible. But in a fast–changing geopolitical environment characterized by the onset of tariffs and a pushback against green initiatives, the two markets are developing mutual ambitions.

The issue has come to the fore in recent weeks, with the Trump administration pushing to secure mineral deals in Ukraine and parts of Africa, and looking to buy Greenland for the same reason. Europe has signaled moves to rearm and the stocks of European defense companies have soared, with the likes of Thales up 82% and Rheinmetall 136% this year, despite the effects of Trump’s trade war on global markets.

“Our security depends as much on tanks and nuclear deterrents as it does on energy stability and an affordable supply of energy," said Laurie Laybourn, executive director of the Strategic Climate Risks Initiative, a climate think tank based in the U.K. “Whether or not you think the world is a more dangerous place, you can still improve the security of your society through renewables."

There is a longstanding argument that investing in defense can’t fit with strong socially responsible corporate values. However, in recent months, market participants in both sectors say that having a strong supply of energy, minerals and technologies reduces reliance on external sources and in turn creates more resilient supply chains able to play down new threats. That means more solar, wind and batteries being made and deployed inside state borders.

“There are some great yet beneficial ironies in having defense actors in the room right now," said Olivia Lazard, a researcher on geopolitics and the energy transition at Carnegie Europe.

Lazard explained that the war in Ukraine exposed many of Europe’s vulnerabilities when it came to energy and minerals. Following the invasion, energy prices across the continent skyrocketed over worries that Russia would cut off gas exports to Europe.

The European Commission recently released a list of 47 mineral sites within the EU’s borders that it considers strategically important, part of a new assessment of the bloc’s mineral resources. When it first started the initiative in 2023, the messaging focused on minerals such as lithium and copper needed for the energy transition. Now, it includes minerals for defense purposes, such as magnesium and tungsten.

“The case for minerals in Europe has become even stronger with a new call for rearming," said Isabelle Dupraz, deputy director at the think tank European Initiative for Energy Security. Dupraz said that despite the fast changes in the geopolitical environment, those shifts could benefit the energy transition. “The need to end oil and gas dependency on national security imperative and economic security imperative."

For investors, returns are already starting to show. Actively managed European ESG funds that included defense stocks outperformed those that didn’t, according to data from Morningstar Sustainalytics. Most funds that include defense saw at least 10% returns at the end of March, while those that didn’t were likely seeing negative returns, according to Morningstar.

Startups have already taken note.

Flight-tracking startup Wingbits said that when it first started operating, most of its customers were looking for ways to reduce the amount of fuel they used when flying in an effort to lower their emissions. Now, the Sweden-based company’s data is increasingly being sought by military actors, who want to see when the GPS signals of airplanes or drones have been jammed in an effort to hide the aircraft.

“That is a major use case if you fly into this area you need to know this is happening so you can combat this," said Robin Wingårdh, co-founder of Wingbits. “Different companies use the same solutions for different things."

Tom Middendorp, a general serving in the Dutch Army and a former chief of defense with the country’s government, said he had seen first hand during tours of Afghanistan how the effects of climate change could lead to tension and conflict.

“It took a while before we found out it was all about water scarcity. The farmers needed water and couldn’t agree on how to divide the little that was there. So that gave further tensions and the Taliban jumped into that," Middendorp said.

Middendorp added that as climate change takes hold, conflict on the ground is likely to worsen. “Looking at defense more strategically, if it already affects our security environments at this moment, that will only further increase looking at the future of how climate is changing," he said.

Swedish green steel startup Stegra, formerly H2 Green Steel, said it originally positioned itself as a low-carbon source of the metal. But, increasingly, demand for its steel is coming from customers concerned about security of supply.

“We have a unique value proposition as well as a secure supply [of steel]," Stegra CEO Henrik Henriksson said. “Even if someone cuts off the supply chain of gas or coal or shipping routes are damaged, the only thing we need is a plug point to the grid, then we can go."

Henriksson added that the environment was now a mid- to long-term priority. “In the short term the name of the game is more security for society," he said.

General Middendorp said that linking the two sectors could be a way to bridge the climate finance gap also.

“If you connect energy security, resource security, economics, with the security itself, then it becomes a more comprehensive topic," he said. “If you look at climate only from a climate perspective, you will lose ground."

Write to Yusuf Khan at yusuf.khan@wsj.com