By Dilan Ashton, General Manager, Responsible Investing, Equity Trustees

The world is changing, and responsible investing is adapting. Sectors once automatically excluded are no longer off the table for investment. Historically, the defence sector has been an outright exclusion across most responsible investment funds.

But in the current geopolitical environment, the rise in defence spending globally is reshaping investor attitudes towards the sector. Investors are now recognising the link between defence and the protection of human rights. As a result, blanket exclusions are being reassessed.

Today's defence landscape is very different

Contributing to the change in investor attitudes is the rise in dual-use technologies that can serve both military and civilian purposes. Modern defence increasingly encompasses cyber security, satellite systems, surveillance technologies and counter-drone capabilities, many of which serve both civilian and military purposes.

These technologies play a role in protecting critical infrastructure, maintaining social order and safeguarding human rights, requiring a deeper and more thoughtful ESG analysis.

Heightened scrutiny still essential

Few companies fit this description in the Australian market. One example is a company that makes AI-driven technology to disable drones. This isn't a company that breaches our hard negative screens, but our ESG due diligence process has identified a number of governance issues with that company, which highlights why case-by-case assessments are so important.

Additionally, sector labels nalone o longer tell us what we need to know. What matters is how companies generate revenue, where their products are deployed, the nature of their customers, and critically, the strength of their governance.

Negative screens still apply but social factors have elevated

Overall, our position on negative screens hasn't changed. We continue to have a zero-revenue tolerance for controversial weapons across our portfolios, and we offer responsible investment-specific funds that exclude weapons manufacturers based on a 10% revenue threshold.

But while environmental topics tend to dominate ESG discussions, this year we expect to see more focus on the social dimensions of ESG. Social performance has repeatedly proven to be financially material and a powerful indicator of long-term quality.

We have found that companies with strong social performance, measured in terms of factors like their employee engagement, labour standards, safety, and the treatment of customers, have delivered better long-term returns compared to companies with weak social scores.

We see performance from a social perspective as a leading indicator of broader company culture and management quality. These are potentially factors that are not fully priced in by the market. Brambles is a good example. The global logistics company supplies reusable pallets and crates across a range of industries, and consistently scores highly in metrics like employee engagement, safety, and labour productivity.

For example, it has reduced safety incidents for the past six years running, increased women in management to almost 40%, and has invested over $10 million into community programs just last year alone.

Overall, we view social performance as measurable and financially material, and often a clear signal of a quality company.

Lessons from reporting season

Turning to the recent Australian company reporting season, we saw real evidence that hard-to-abate sectors are starting to move from commitment to execution in their climate targets.

Energy company Santos, for example has met its 2030 scope one and two emissions targets five years early. That can be attributed to its carbon capture and storage project. The project, located in the Cooper Basin just north of Adelaide, has been up and running since 2024. It is designed to capture CO2 generated from the Moomba gas plant and permanently store it underground in depleted reservoirs.

The project has the potential to store up to 1.7 million tonnes of CO2 per year, equivalent to taking around 700,000 petrol cars off the road. We're seeing similar momentum with the miners, with BHP and Rio Tinto trialling battery electric haul trucks. If these are deployed at scale, they'll go a long way to lowering the miners' operational emissions.

The key takeaway is that companies are investing significant time and money to lower their emissions, and we're starting to see tangible progress. It really reflects the value of active ownership over divestment where persistent shareholder engagement can drive genuine progress.

The rise of AI governance

AI governance has emerged as another dominant theme, and companies are introducing frameworks and governance structures to ensure the safe and ethical rollout of AI across their businesses. Without these guard rails, we have seen that AI can produce biased and incorrect or inconsistent results.

There are several examples that have already caused financial and reputational damage. However, we see Commonwealth Bank of Australia as a standout within its sector when it comes to AI governance. CBA's approach is centred around six key principles, and it is making good progress in this area. As AI adoption accelerates, good governance in this area could offer competitive advantages.

Active ownership an effective tool

We believe active ownership is one of the most effective tools investors have to drive real-world change.

Our process uses a proprietary ESG scoring framework to rate companies on their ESG performance. To further inform our views in this area, we use external ESG research, direct company meetings and engagements, as well as site visits.

The key takeaway here is that companies are investing time and money to improve their environmental, social and governance performance, and we're starting to see tangible progress. This really reflects the value of active ownership over divestment where persistent shareholder engagement can drive genuine progress.

Ultimately, responsible investing is evolving, moving beyond blanket exclusions to rigorous, case-by-case analysis and active ownership - even in sectors like defence which were once considered off limits.

 

This article was first published Financial Standard 15 May 2026