Episode Details

Arushi Agarwal from the European Sustainability Strategy team and Aerospace & Defense Analyst Ross Law unpack what a reshaped defense industry means for sustainability, ethics and long-term investment strategy.

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Ross Law: Welcome to Thoughts on the Market. I'm Ross Law from Morgan Stanley's European Aerospace and Defense team.

Arushi Agarwal: And I'm Arushi Agarwal from the European Sustainability Research Team.

Ross Law: Today, a topic that's rapidly defining the boundaries of sustainable investing and technological leadership – the use of AI in defense.

It's Tuesday, July 8th at 3pm in London.

At the recent NATO summit, member countries decided to boost their core defense spending target from 2 percent to 3.5 percent of GDP. This big jump is sure to spark a wave of innovation in defense, particularly in AI and military technology. It's clear that Europe is focusing on rearmament with AI playing a major role.

In fact, AI is revolutionizing everything from unmanned systems and cyber defense to simulation training and precision targeting. It’s changing the game for how nations prepare for – and engage in – conflict.

And with all these changes come serious challenges. Investors, policy makers and technologists are facing some tough questions that sit at the intersection of two of Morgan Stanley's four key themes: The Multipolar World and Tech Diffusion.

So, Arushi, to set the stage, how is the concept of sustainability evolving to include national security and defense, particularly in Europe?

Arushi Agarwal: You know, Ross, it's fascinating to see how much this space has evolved over the past year. Geopolitical tensions have really pushed national security much higher on the sustainability agenda. We're seeing a structural shift in sentiment towards defense investments.

While historically defense companies were largely excluded by sustainability funds, we're now seeing asset managers revisiting these exclusions, especially around conventional and nuclear weapons. Some are even launching thematic funds, specifically focused on security and resilience.

However, in the absence of standard methodologies to assess weapon related exposures, evaluate sector-specific ESG risks and determine transparency, there is no clear consensus on what sustainability focused managers can hold.

Greater policy focus has created the need to identify a long-term approach to investing in this sector, one that is cognizant of ethical issues. Investors are now increasingly asking whether rapid technological integration might allow for a more forward-looking, risk aware approach to investing in national security.

Ross Law: So, it's no news that Europe has historically underspent on defense. Now, the spending goal is moving to 3.5 percent of GDP to try and catch up. Our estimates suggest this could mean an additional $200 billion per year in additional spend – with a focus on equipment over personnel, at least for the time being. With this new focus, how is AI shaping the European rearmament strategy?

Arushi Agarwal: Well, AI appears to be at the core of EU’s 800 billion euro rearmament plan. The commission has been quite clear that escalating tensions have not only led to a new arms race but also provoked a global technological race.

Now to think about it, AI, quantum, biotech, robotics, and hypersonic are key inputs not only for long-term economic growth, but also for military pre-eminence.

In our base case, we estimate that total NATO military spend into AI applications will potentially more th