2025.10.31
Defining the Boundaries of Sustainable Investing in an Era of Expanding Defense Spending — Cadira’s Investment Policy
In recent years, rising geopolitical tensions have heightened the importance of the defense industry across the world. The North Atlantic Treaty Organization (NATO), which has long set its member states’ defense expenditure target at 2% of GDP, has agreed to raise this goal to around 5% by 2035. Japan, too, which traditionally kept defense spending below 1% of GDP, has announced a policy target to reach approximately 2% by 2027.
Institutional investors with a strong emphasis on sustainability have generally excluded defense and weapons-related businesses from their investment universe. However, as global conflicts have increased, there has been a gradual shift in attitudes—some investors are beginning to accept investments in the defense sector. While inhumane weapons remain excluded, an emerging view holds that investment in conventional defense equipment can be justified on the grounds that “national defense forms the foundation of social safety.”
At CCM, we maintain a clear policy to exclude not only controversial weapons but also companies whose core business (5% or more of total revenue) derives from conventional weapons. Our strategy is designed with a primary focus on investments in sectors that contribute to environmental preservation and quality-of-life improvement. Accordingly, we do invest in industries such as security sensors and cybersecurity, which help maintain social order, but we consider weapons—whose purpose inherently includes destruction or harm—to be inconsistent with our firm’s investment philosophy.
Despite the recent changes in the global security environment, we have no intention of relaxing our investment criteria for weapons-related companies. Instead, we aim to contribute to long-term security through investments in enterprises that promote mutual understanding, social inclusion, and conflict prevention via sound economic activity—offering solutions to social challenges without reliance on force.
It is worth noting that components originally manufactured for civilian use may sometimes end up being used in weapon production. Moreover, depending on external evaluation standards, certain non-lethal defense products may be classified as inhumane weapons, which requires careful attention. For instance, Daikin Industries, Ltd. (6367)—not held in our Fund—once produced white phosphorus smoke munitions intended for smoke screens. However, due to concerns that these could be repurposed into incendiary weapons, classified as inhumane, Daikin was placed on several investors’ exclusion lists. Although the related sales were only a few hundred million yen—a negligible fraction compared to the company’s total revenue of approximately JPY 4.7 trillion—the case had a significant impact on investor assessments. (Daikin Industries has since decided to withdraw from white phosphorus munition production by the end of FY2025.)
Looking ahead, as global defense spending continues to rise, demand for weapons will likely expand, making it increasingly difficult to eliminate indirect involvement entirely. In practice, we conduct thorough due diligence on companies with any potential connection to weapons-related activities, confirming that they have no intention to increase exposure to such businesses. We leverage data from third-party ESG information providers to monitor the proportion of weapons-related revenue, ensuring a robust process to avoid inadvertent inclusion.
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