Sustainable finance framework to the defence industry: The limit of our export control compliance is the limit of our understanding thereof.

When Export Control is formally considered the ESG Era

Bridging regulatory demands and ESG commitments

This is what is subtly in filigree of a recent EU Commission’s guidance notice[1] on the applicability of the EU Sustainable finance[2] framework to the defence industry.

After having reminded that:

– The Notice is intended for all investors and operators referred to in the EU sustainable finance framework, as well as public authorities and bodies.

– The Notice will be particularly relevant for:

— financial market participants;

— ESG rating providers, meaning a legal person that issues ESG ratings or scores on a professional basis (3);

— providers of ESG labels (ecolabels, national labels etc.);

— stock exchanges/index providers, benchmark providers, data vendors/certification bodies, etc,

the EU Commission confirms to the world of finance and operators that investing in the defense industry is a vital to EU resilience, security and to broader EU and UN objectives. This statement seeks to eliminate any unwarranted discrimination against the financial sector in investment decisions and ESG practices, particularly amid ongoing debates regarding the alignment of defense and Sustainability. The message is clear: there should no longer be any ambiguity—Europe’s sustainability-related regulations apply uniformly across all sectors.

The EU Commission takes different examples of Sustainability regulations (incl. CSRD, SFRD ) to demonstrate the compatibility with defense activities.

The demonstration starts with the EU Taxonomy which serves as a shared dictionary for investors to assess how economic activities contribute to European environmental goals. The Commission encourages, operators to factor in “due diligence requirements and measures put in place to comply with the national export control legislations as contributing towards the fulfilment of UN Guiding principle 13, principles 3 and 6 of Ch. IV of the OECD Guidelines for Multinational Enterprises, and in turn towards the minimum safeguards  required under Article 18(1) of the EU Taxonomy Regulation”.

The guidance then focuses on “the Corporate Sustainability Due Diligence Directive” (referred to as CSDDD)  which addresses the particularities of the  the defence sector through the adaptation of the due diligence obligation. In deed such obligations do not apply to activities of downstream business partners that are related to products which are subject to export control by a Member State (meaning either the export control under Regulation (EU) 2021/821 of the European Parliament and of the Council regarding the control of exports, brokering, technical assistance, transit and transfer of dual-use items, or the export control of weapons, munitions or war material under national export controls), after the export of the product is authorized.

Thereby underlining subtly that, although being excluded from the Due Diligence Directive’s obligations, the trade of these “controlled” items is subject to other stricter -and in fact more restrictive- constraints.

After reminding the complex regulatory web (both by means of International Treaties[3] and  of EU legislation) which organizes the necessary frame and control of international trade of  High-tech goods and data, discreetly referred to as “sensitive goods”; the EU Commission, deepening its regulatory screening firstly addresses military technology and equipment with regard to both related Extra EU Transfers (i.e Exports) and Intra -EU transfers and secondly the Extra EU Transfer(i.e Export) of Dual-Use items.

Any compliance officer or CFO who has not been trained or educated in the defence sector will appreciate the meaning behind the lines from the following extracts of this EU Commission’s notice:

“The export and intra-EU transfer of military and dual-use items is subject to strict controls implemented by Member States. Member States’ enforcement of compliance with EU and international legislation relies on the industry taking due diligence measures. For instance, as a prerequisite to obtain export licenses, defence companies are required to implement robust internal control and compliance measures, imposed by national export control authorities”. The close supervision by Member States’ agencies enforcing the export control mechanism constitutes an important part of addressing potential adverse impacts of the products developed by the defence industry.

The Common Position[4] lists criteria which need to be considered by Member States to grant an export licence. These conditions include, inter alia, the respect of human rights in the recipient country and the preservation of regional peace and security. The Common Position is legally binding on Member States.

The User’s Guide includes a series of mechanisms Member States can put in place to address re-export and end-user concerns, such as the minimum information to be contained in an end-user certificate. These include, among others ‘end-use and/or non re-export clause, where appropriate’ and an option for Member States to include ‘a clause prohibiting re-export of the goods covered in the end-user certificate’. The methodology included in the User Guide, as well as the international agreements it references[5] serve as standards against which Member State authorities assess the behaviour of companies in the sector.

Intra-EU transfers of military technology and equipment

Intra-EU transfers are also regulated through Directive 2009/43/EC (33) on transfers of defence-related products within the Union, which sets out several criteria for consideration by Member State’s authorities prior to authorizing the transfer of defence equipment or technology. These include, for example, processes to avoid the possible diversion of defence-related products. It also lays down a requirement for Member States export authorities to monitor the recipient country’s compliance with the export limitations set out in the transfer licence, once every three years.

Extra-EU transfer (Export) of dual-use items

The EU  Commission recalls that the export control of dual-use items is subject to EU legislation, and subject to different governance from the export of military items. Regulation (EU) 2021/821 established the EU regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items.

In 2019, the Commission issued Recommendations (2019/1318) on the internal compliance programmes for dual-use trade controls under Council Regulation (EC) No 428/2009 for companies engaging in the export, transfer, brokering and transit of dual-use items. Companies seeking certain licenses should have internal compliance mechanisms covering the following aspects, which could also serve as a template for financial operators seeking to assess the due diligence of relevant companies:

• top-level management commitment to compliance;
• organisation structure,
• responsibilities and resources;
• training and raising awareness;
• regulatory monitoring
• transaction screening process and procedures;
• performance review,
• audits,
• reporting and corrective actions;
• record-keeping and documentation;
• physical andinformation security”.

Similarly, the guidance recalls the existence of provisions of the EU sustainability reporting standards, known as ESRS (European Sustainability Reporting Standards) in the CSRD, that are particularly relevant to the defence industry since it allows the omission of sensitive or classified information such as the volume of raw material  (ESRS 1, paragraph 105).

Eventually, the EU Commission refers to Section 3 of the European defence industrial strategy unveiled on March 5^th 2024, which recognises the defence industry as a crucial contributor to peace and social sustainability thereby inducing that defense is far from being incompatible with Sustainability.

The core expertise of our cross profiles professionals combined with our transversal approach of the above mentioned legal and regulatory issues offers a high standard of both competence and experience to assist any economic actor operating in relation with the industries of defence, in his concern for compliance.

The EU Commission’s guidance is therefore highly welcome, as it formalizes a crucial shift: Sustainability is no longer just an optional consideration but a central pillar of both competitiveness and regulatory compliance.This is fully aligned with Christine Lagarde’s August 2025 letter to EU lawmakers[6], warning that diluting sustainability reporting standards (and due diligences requirements in CSR Directive’s latest up-date 2026/470) would undermine Europe’s financial stability and global competitiveness: transparency and traceability not being bureaucratic hurdles but strategic assets for risk management and investor confidence.

In this context, the EU’s approach to export control and Sustainability is clear: compliance is not just about avoiding penalties but about securing long-term competitiveness. Sustainability is the new frontier of competitiveness and those who lead in transparency and accountability will shape the future of global trade.

Footnote:

[1]C/2025/4950 – OJEU Dec 30^th 2025

[2]Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, facilitating a better appreciation of sustainability-related risks and more investments in sustainable economic activities and projects.

[3]Such as the Treaty on the Non-Proliferation of Nuclear Weapons (1968), to which all EU Member States are parties, which provides that each undertakes not to transfer nuclear weapons or explosive devices directly or indirectly, and which clarifies this obligation as a basis for denying relevant export licenses, and other treaties. The User’s Guide to the Common Position provides a comprehensive, yet non-exhaustive, list of Treaties to be taken into consideration before authorising an export license . These include treaties and international instruments (regimes) governing use and/or stockpiling and/or export and transfer or military equipment and technology, such as (but not limited to): the Australia Group, MTCR, Zangger Committee, Nuclear Suppliers Group, Wassenaar Arrangement, The Hague Code of Conduct against the Proliferation of Ballistic Missiles (HCoC), etc

[4]2008/944/CFSP OJ L 335

[5]Such as the Wassenaar Arrangement End User/End Use Controls for Exports

[6]https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter250815_Eickhout_Gerbrandy_Pietikainen_Saramo_Wolters~25dd21fe84.en.pdf