This article examines the increasingly difficult set of competing pressures on investors who take a particular ethical approach to managing money, given the performance of sectors that have traditionally been seen as off limits, such as defence.

The following article is from Mashrufa Miah, who is senior investment manager at Sarasin & Partners. The editors are pleased to share these ideas and hope they contribute to conversations. The usual editorial disclaimers apply to views of guest writers. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

In recent years, investors have been forced to confront major geopolitical events that still dominate today. This is in parallel with the emergence of ChatGPT, which has ignited the widespread adoption of artificial intelligence and a corresponding boom in financial markets.

As we move towards a more fragmented, multipolar world, charity investors continue to face the dilemma of aligning their financial goals with their charity’s values, purpose, and the interests of their wider stakeholders. Looking at some of the best performing sectors over the year to date, whilst semiconductors and communication services have dominated (+32 per cent and +19 per cent respectively), armaments (+45 per cent) and tobacco (+26 per cent) have generated strong returns, leaving investment committees with an unenviable challenge.

Financing the defence sector
Since 2022, awareness has grown of the defence industry’s role of ensuring national security in an increasingly unstable geopolitical context. It is therefore no surprise that the share prices of European defence companies have surged this year, buoyed by rising demand and expectations of increased future spending.

Defence investment has re-emerged as being in vogue: not only as a matter of national security, but also of strategic and economic importance. Against this backdrop, trustees have a delicate tightrope to walk, in developing robust investment policies that are suitably compliant without hindering the delivery of sustainable future returns.

Balancing this trade-off often comes down to managing reputational risk and the charity’s specific objectives.

Indeed, the defence sector has been praised for its support of Ukraine but criticised for its exports to Israel. Ultimately, this decision rests with trustees to determine whether a sector aligns with their charity’s mission. Embracing the broad market universe might be appropriate for some charities, where it produces conflicts for others. A military charity’s ethical policy could differ considerably from one with Quaker roots, for example.

It is also vital for trustees to understand the distinction between imposing ethical exclusions in portfolios and applying integrated ESG assessments of companies. While the former involves screening out sectors, typically on a revenue threshold basis, based on values or mission, the latter focuses on managing both financial and non-financial risks and opportunities.

It is notable that regulators have not barred investment in defence companies within sustainable funds. In March 2025, the UK’s Financial Conduct Authority (FCA) confirmed that there were no regulatory grounds to exclude them from SDR-labelled sustainable funds, a view echoed by the EU’s reporting regime.

This has opened the door for UK companies such as BAE Systems and Rolls-Royce to be considered in a wider array of investment portfolios. Defence companies may well have a place in portfolios due to the higher yields, relatively low correlation to other sectors, and strong cash flows, which are supported by long-term government contracts.

Conversely, the risks of investing in the sector are well documented. Cyclical revenues and earnings streams, dependence on central government budgets, limited visibility over long-term contracts, and reputational issues such as corruption and allegations of price-fixing, can all contribute to investment uncertainty.

Technology at a moral crossroads
Similarly complex ethical questions arise when investing in the AI value chain. Since 2023, the “Magnificent 7” played an increasingly outsized role in shaping global equity market returns.

While we have held exposure to six of the seven companies (excluding Tesla), we have also carefully considered the associated risks: misinformation, deepfakes, bias, harmful content, and broader cyber and data security concerns.

Technology’s impact on mental health raises a critical question: although investing in companies positioned to benefit from AI may enhance portfolio performance, are such investments appropriate for charitable portfolios?

There is no definitive answer, and it is not one for us to give. Under the Trustee Act 2000, trustees have wide discretion over investments, encompassing both financial objectives and values-based considerations. For some charities, the red lines are clear; for others less so.

As shareholders in these companies, we have a responsibility to ensure that companies have governance processes in place to ensure that AI is being used responsibly.

Is a reconciliation possible?
We are witnessing a turbulent shift in the geopolitical landscape, where reputations can be tarnished in a single tweet, and charity investors face growing scrutiny to ensure that their portfolios reflect their core values. Since the inauguration of President Trump, these dilemmas have only intensified, with the evolving landscape necessitating regular review and reassessment.

One of the biggest debates in the investment industry is whether divestment is the best route to achieving desired outcomes. Should charities refuse to invest in companies deemed unethical? Should they apply blanket exclusions to certain sectors? Or should they assess companies individually?

The discussion is more nuanced. While the defence industry has attracted significant attention this year, it represents only around 2.5 per cent of the global equity market – a reminder to be proportionate when focusing on a relatively small part of the investable universe.

We are open to exploring all opportunities, if we believe they can deliver our clients long-term capital growth and ESG risks are appropriately reflected in valuations and client portfolios. Ultimately, this is underpinned by our belief that responsible investment is just as much a moral choice, as it is an economic and financial choice too.