Investing in UK Defence Stocks: Ethical Dilemmas and Financial Returns Post-2025

It’s a question many UK investors have been wrestling with since the seismic events of 2022. What began as a distant conflict reshaped borders, global alliances, and something closer to home: the FTSE 100 share prices of Britain’s biggest defence companies.

You’ve likely seen the headlines. BAE Systems shares are hitting record highs. Rolls-Royce (a key defence supplier) is soaring. The narrative was clear: in a more dangerous world, defence spending goes up.

But for the thoughtful investor, a deeper question lingers. How do we reconcile our portfolios with our principles?

Investing in defence isn’t like choosing between a tech fund or a property fund. It sits at the crossroads of geopolitics, ethics, and cold, hard financial returns. It’s uncomfortable, complex, and incredibly relevant in 2026.

This isn’t an article telling you what to think. It’s a guide to help you think it through for yourself. We’ll look at the financial case, confront the ethical questions head-on, and explore how UK investors in 2026 are navigating this uniquely challenging sector.

Image: A split graphic. Left side: A stylised, neutral blueprint of a military vehicle. Right side: A hand holding a set of scales, one side labelled “Returns,” the other “Ethics.” The title reads: “The 2026 Defence Investor’s Balance.”

Part 1: The New World Order – Why Defence is Front Page News

To understand the “why now,” we need to look at the changed landscape.

The Spending Surge: A Fact, Not a Forecast

Before 2022, many Western nations had let defence budgets stagnate. The “peace dividend” post-Cold War was a reality. That era is over.

The UK Pledge: In 2023, the UK government committed to increasing defence spending to 2.5% of GDP (from just over 2%). That’s billions more in annual funding, locked in for the long term.
The European Shift: Germany’s historic Zeitenwende (“turning point”) unleashed a €100 billion fund. Nations across Europe are scrambling to rearm.
The Global Ripple: From Japan to Poland, budgets are being rewritten. Defence is no longer a “nice-to-have” line item; it’s a national security imperative.

This isn’t a short-term boom. It’s a structural, multi-decade shift in government spending priorities. For companies that build the kit, it translates into overflowing order books stretching out for a decade or more.

Meet the UK’s Defence Champions

The UK has a small but world-leading defence sector. These aren’t shadowy arms dealers; they are publicly listed engineering titans.

1. BAE Systems (BA.): The National Champion

What they do: They build it all. The Typhoon fighter jet, the Queen Elizabeth-class aircraft carriers, nuclear submarines, cyber security systems, and advanced electronics.
The 2026 Picture: Its order book is at a record £70+ billion. It’s a prime contractor, meaning it manages the big, complex projects. It’s seen as a “defensive stock” in a volatile world—governments rarely cancel these contracts.

2. Rolls-Royce (RR.): The Hidden Defence Giant

We know it for jet engines, but its Defence division powers the Royal Air Force’s fighters, bombers, and submarines (including the nuclear reactors for the Royal Navy’s subs).
Its turnaround story is partly powered by the certainty of long-term defence service contracts.

3. Babcock International (BAB): The Servicer

Less about building new kit, more about maintaining, servicing, and upgrading the existing fleet of ships, submarines, and land vehicles.
A steady-eddie business with highly predictable, long-term government service contracts.

4. QinetiQ (QQ.): The Brainy One

The science and technology arm. Tests new equipment, develops futuristic tech like AI for defence, and provides technical advice. Less “metal-bashing,” more “thinking.”

Image: A simple, clean infographic titled “The UK’s Defence Ecosystem.” Four icons representing each company with a short tagline: BAE “The Builder,” Rolls-Royce “The Power,” Babcock “The Carer,” QinetiQ “The Thinker.”

Part 2: The Financial Case – Beyond the Headlines

Let’s talk numbers. Why have these stocks been so strong, and can it continue?

The Investment “Pros” in 2026:

Unprecedented Visibility: Governments sign contracts for 20-30 years. This gives earnings extreme predictability, which investors love.
Pricing Power: There are only a handful of companies globally that can build a nuclear submarine. This lack of competition means healthy profit margins.
Inflation Protection: Many contracts are “cost-plus,” meaning if steel or labour gets more expensive, the government covers the increase. This is a huge advantage in a volatile inflation environment.
Reliable Income: BAE, for example, is a Dividend Aristocrat, raising its payout for over a decade. It’s becoming a classic income stock with a growth kicker.
Non-Cyclical Demand: Unlike car companies or retailers, demand doesn’t depend on the consumer feeling flush. It depends on geopolitics, which currently point in one direction.

The Financial Snapshot (Illustrative Figures):
Imagine a £10,000 investment split across a defence ETF in early 2023. By 2026, that investment could have significantly outperformed the wider FTSE 100, driven by those record orders and re-rating by investors.

*Image: A line graph comparing two lines from 2022 to Jan 2026. Line 1 (Blue): “FTSE 100 Index.” Line 2 (Red): “Hypothetical UK Defence ETF.” The defence line shows a steeper, more consistent climb, particularly post-2022. Caption: “A Sector Apart: Defence vs. The Wider Market.”*

Part 3: The Heart of the Matter – The Ethical Debate

This is where it gets personal. Let’s lay out the arguments with respect.

The Case For (The “Deterrence” Argument):

“You’re Investing in Defence, Not Offence.” Proponents argue these companies provide deterrence. A strong, technologically advanced military prevents conflict. It protects the Ukrainian-style democracies of the future.
“It’s About National Sovereignty.” Supporting UK defence maintains sovereign capability and high-skilled UK jobs (over 90,000 at BAE alone). Would you rather the technology and jobs be in less scrupulous hands?
“It’s a Legal, Regulated Industry.” The UK has some of the world’s strictest arms export controls. These companies don’t sell to just anyone.
“Where Do You Draw the Line?” Is a company that makes body armour for soldiers ethical? What about cyber-defence software? The supply chain is deeply interconnected with civilian tech.

The Case Against (The “Profiting from Conflict” Argument):

The Core Objection: You are financially benefiting from a world that has become more dangerous and militarised. Your dividends are linked to geopolitical instability.
The “Blood Money” Fear: Even with controls, weapons can end up in conflict zones or with regimes you might find abhorrent. The connection, however indirect, can feel troubling.
The Opportunity Cost Argument: Your capital could be funding renewable energy, medical research, or sustainable housing—solutions to the world’s problems, not the symptoms.
Personal Alignment: For many, it simply clashes with deeply held beliefs about peace and non-violence. No financial return can override that.

There is no “right” answer. This is a values-based decision every investor must make for themselves.

Part 4: How UK Investors Are Navigating This in 2026

So, what are people actually doing? We’re seeing several approaches emerge.

1. The Full Exclusion (The Purist)

This investor uses “Ethical” or “ESG” funds that explicitly screen out controversial weapons (like cluster munitions, landmines) or the entire defence sector. Many pension funds now offer this option.

Tool: ESG/SRI (Socially Responsible Investing) Screens.

2. The Nuanced Selector (The Pragmatist)

This investor makes distinctions. They might be comfortable with:

Cyber-defence and intelligence (like QinetiQ) but not traditional weaponry.
Companies focused on UK/NATO contracts only.
Dual-use technology (tech with civilian and military applications, like Rolls-Royce engines).

3. The Unconflicted Allocator (The Financial Pragmatist)

This investor separates ethics from finance. They view defence as a sovereign, legal industry crucial to the national interest and see the financial opportunity as clear-cut. Their pension’s job is to grow, and this sector is growing.

4. The Engaged Shareholder (The Activist)

A newer, small trend. This investor buys a few shares to gain voting rights and file shareholder resolutions, pushing for stricter ethical controls, transparency in exports, and investment in dual-use tech.

Part 5: Your Practical Toolkit for a 2026 Decision

Feeling overwhelmed? Let’s break it down into a personal checklist.

Step 1: The Self-Reflection Quiz.
Ask yourself:

Does seeing “Defence” in my portfolio statement make me feel uncomfortable or secure?
Am I more convinced by the deterrence or the profiteering argument?
Is this a red line for me, or an area for nuance?

Step 2: The Transparency Check.
If you’re considering investing, dig deeper than the company name.

Visit the investor relations page of BAE Systems. Read their Ethics and Code of Conduct policy.
Look at their annual report. What percentage of sales are to the UK MoD vs. other governments? This information is public.

Step 3: The Implementation Choice.

To Exclude: Search for “ESG UK Equity Funds” or “Sustainable All-Cap Funds.” Check their policy documents to confirm that defence is excluded.
To Invest Directly: You can buy shares in the individual companies.
To Invest Broadly: A standard FTSE 100 tracker will contain BAE and Rolls-Royce (approx. 2-3% combined). Are you comfortable with that small, passive exposure?

Step 4: The Portfolio Review.
Look at your pension and ISA. Do you even know if you’re invested in defence? For many, it’s hidden in a generic “UK fund.” Finding out is your first act of ethical investment.

Conclusion: Finding Your Own Balance in a Complex World

The journey of investing in UK defence stocks in 2026 is ultimately a journey into your own priorities.

The financial case is powerful: a sector with decades of visible growth, pricing power, and resilient dividends in an uncertain world. It is, by traditional metrics, a compelling investment.

The ethical case is deeply personal. It forces us to confront uncomfortable truths about global security, the role of the state, and what we’re willing to fund for a return.

Perhaps the most important outcome of this debate isn’t a universal answer, but more engaged, thoughtful investors. Whether you choose to invest, exclude, or select nuance, you’ll be doing so with your eyes open—understanding both the balance sheet and the weight on your conscience.

In 2026, the defence investment isn’t just about buying shares. It’s about buying into a specific vision of how security is maintained in a fragile world. Make sure it’s a vision you can live with.

Your 2026 Action Step: This week, open one of your pension or investment statements. Use the fund name to look up its “top 10 holdings” online. See what’s in there. That simple act of awareness is the first and most powerful step any investor can take.

Final Thought: “In times of peace, the warlike man attacks himself.” – Nietzsche. In times of heightened tension, the peaceful investor must also turn inward to examine their own principles and priorities. The most secure portfolio is one you can hold with conviction.