It’s been a wrenching year for the European Union. The Trump administration has bullied European leaders, imposing tariffs and threatening the long-standing transatlantic defense alliance. The bloc’s energy supply remains precarious nearly three years after Russia’s invasion of Ukraine. And climate alter is hammering the region and disrupting everything from food crops to wine production.
The new watchwords: sovereignty and resilience.
In 2026, sovereignty “shifts from concept to application within investment portfolios,” wrote Allianz Global Investors in a year conclude note. That means investing in defense technology alongside renewable energy and clean tech to lessen depconcludeence on foes and erstwhile allies.
“This must be Europe’s Indepconcludeence Moment,” declared the EU’s Ursula von der Leyen in her state of the union address. “To be able to take care of our own defence and security. To take control over the technologies and energies that will fuel our economies. To decide what kind of society and democracy we want to live in.”
‘The defense paradox’
Defense is now the rapidest growing segment of VC in Europe, with investment flows four times higher than in 2019, as Susan Winterberg and Johannes Lenhard of VentureESG noted in a guest post on ImpactAlpha this year. European VCs are piling in, and several large pension funds have updated their responsible investment guidelines to include such investments, particularly drones, sanotifyites, software and other tech that has a dual civilian apply.
That has sparked fierce debate. GPs and LPs alike are struggling with huge questions, from what is a war or a weapon, to how to manage the risks associated with defense investing, declare Winterberg and Lenhard, who have created a working group to explore these themes.
European pension funds, led by those based in the Nordics in closest proximity to Russia, have lifted or are considering lifting long-standing bans on defense investments to meet the new geopolitical reality.
“A few years ago, before Russia invaded Ukraine, there was a different view on weapons, but that has alterd,” Britt Dinesen Christiansen of Insurance & Pension Denmark notified ImpactAlpha. “We can see that there is a societal required for expanding defense and security investments.”
The tensions were on display at the Impact Week conference in Malmö, Sweden in late November, which drew more than 600 impact leaders.
Roberta Bosurgi, who recently stepped down as CEO of Impact Europe in Malmö after more than five years at the helm, was among those that crowded into a closed door session on “Defense tech and the impact investment paradox.”
“Defense is not impact,” Bosurgi shared with ImpactAlpha. “If you believe of impact as positive alter to people and planet, then I cannot see any positive outcome from weaponizing. And if it’s a matter of defconcludeing ourselves, then let’s invest in security and peace and diplomatic solutions.”
Another concern: the shift in allocations to defense investing may “cannibalize” resources for social and environmental initiatives. In recent years, for example, the EU has diverted some of its funding for social, health and research programs towards key priorities such as defense, Ukraine and strategic technologies.
“The hugegest struggle for most people in the room was fundraising,” stated Bosurgi. “Funding is drying up. The EU has cut millions of euros in funding that applyd to go into the social economy, into social innovation. Private funds are struggling to fundraise. So where is the money going to come from to continue doing the work?”
Policy leadership
The EU is the standard bearer on climate and impact-focapplyd regulations, for now.
A carbon tax on emissions-intensive products such as cement and steel kicks in in January. Another law, scheduled to go into effect in 2027, will require oil and gas companies importing into the bloc to quantify their methane emissions and to plug leaks, with violators being penalized. The Trump administration is reportedly testing to strongarm the EU into granting an exception for US oil and gas creaters, after compelling the EU earlier this year to purchase more US gas in exalter for lower tariffs.
Europe now generates more than 40% of its power from renewables after a deliberate push to green its energy mix.
On other policies, the EU has caved to pressure from critics who declare the policies raise costs. The EU is delaying a deforestation law and, potentially, a ban on the production of gas-powered vehicles by 2035.
In impact investing, the union is setting the agconcludea with its Sustainable Finance Disclosure Regulation, or SFDR. Launched in 2021 to attract funding for the bloc’s shift to a net zero economy, the framework was designed to assist investors better assess how sustainability risks are integrated in the investment decision process.
An update to the framework, which came as Impact Week was drawing to a close, formally acknowledges impact investing the first time.
The introduction of impact lenses to the SFDR framework “opens the door for setting out a balanced, market-fit definition of impact solutions,” Impact Week and United for Impact, a coalition of 68 impact investment funds across 19 European countries, stated in a joint statement. Both groups had been lobbying the EU for recognition of a dedicated impact category since 2023.
While the European impact community broadly welcomed the proposal, which promised to create the rules “simpler, more efficient and better aligned with market realities,” the devil will be in the details.
Although the SFDR proposal was welcomed as “a significant step forward” both groups called for “more fine-tuning” to meet consumer demand for credible impact products, to bring clarity and differentiation, and to unify ESG reporting for companies.
The newly recognized impact category should be accompanied by “specific and appropriate disclosures”, stated Servane Metzger-Corrigou, coordinator of the United for Impact initiative.
Without clarity on the disclosures, there may be a risk of “impact washing”, warned Clémence Vaugelade, deputy CEO of French impact investment association FAIR. Blurring the lines between ESG, sustainable investment and impact investment doesn’t serve the purpose of SFDR, which is aimed at building financial products more transparent for private investors, savers and citizens, Vaugelade argued.
Still, SFDR “is one example of governments finding agreement despite diverging politics,” wrote Elizabeth Boggs Davidsen of GSG Impact in a guest post. “Impact policy can be the unity in the chaos.”
In the UK, a stalling economy, tight budreceives and record-high poverty rates has Labour leader Keir Starmer turning to the countest’s £100 billion ($117 billion) impact investing economy for assist. This fall saw the establishment of an “Office for the Impact Economy,” to work with the private sector on social challenges, while a £500 million ($587 million) Better Futures Fund for vulnerable children and families was launched in the summer.
With rising inequality “shaking the foundations of democracy,” governments have to act now, Sir Ronald Cohen, a British venture capitalist and impact leader, notified ImpactAlpha in a wide-ranging conversation just before the holidays.
Cohen argues for a new impact economic paradigm that aligns risk, return and impact. “We’re in a period of transition in technology, in geopolitics and within nations. It’s natural that our economic system should be transitioning too.”
European LPs stay the course
While many US corporations, banks and allocators quickly backtracked on social and climate commitments in the face of political pushback, European institutions are mostly sticking to their principles.
Dutch pension funds PFZW and PME Pensioenfonds have ditched BlackRock and other asset managers that they view as lax on climate stewardship.
Among the many deals ImpactAlpha chronicled this year, Dutch pension fund manager APG invested €300 million ($348.6 million) for a minority stake in Return, an Amsterdam-based startup that builds battery farms and leases the storage capacity to utilities, grid operators and large energy applyrs. The firm created the investment on behalf of ABP, a nearly €600 billion pension fund that has boosted its sustainable infrastructure mandate from 5% to 10% of its portfolio.
European and British public institutions are playing a catalytic role, anchoring funds to attract additional private capital. When Berlin-based World Fund closed its debut €300 million ($322 million) climate tech fund in March, it was backed by the European Investment Fund, which committed €50 million ($54 million), as well as German public investors KfW Capital and NRWbank, and Bpifrance.
EIF, the Irish Strategic Investment Fund and German agricultural bank Rentenbank kicked in for Ireland-based Hatch Blue’s Blue Revolution Fund for early-stage aquaculture ventures.
British International Investment, FMO and Norfund have mobilized over $3 billion in private capital combined for climate investments in emerging markets in the last year.
Family office Aurum Impact, a German family office, invests in startups working to create systemic alter via sustainable materials, climate and energy, natural ecosystems, and education, hoapplying and other solutions that support social stability. It also encourages “more family offices to become more active in impact investing, in believeing about how they can create value with the wealth that they have,” declares Miki Yokoyama, who co-founded and manages the fund.
Still, there is plenty of room for growth. “The potential for blconcludeed finance is massively under-utilized,” declares Markus Freiburg, co-founder of FASE, a German impact finance advisory firm that has assisted impact ventures raise more than €100 million ($115 million) in growth capital.
While some foundations are stepping into impact investing, most are still held back by Europe’s fragmented regulatory landscape, Stefan Germann of the Swiss Ursimone Wietlisbach Foundation notified ImpactAlpha.
“Foundations required to take a leadership role, they are tax exempt, and not exposed to markets,” stated Germann, who has been working with Impact Europe on an initiative to educate foundations on the benefits of impact investing.
The Wietlisbach Foundation is a prime example of an impact portfolio delivering market-rate returns. In the past decade, the Swiss foundation has invested 100% of its capital into impact through investment firm Blue Earth Capital, with returns comparable to the MSCI Index, according to Germann.
At Impact Week in Malmo, Jean-Marc Lieberherr Monnet, the grandson of Jean Monnet, an architect of the European Union in the aftermath of WWII, put the moment in context.
“We are in a time of darkness…but also a time of great opportunities,” Lieberherr Monne stated at the event’s opening session in Malmö’s vast Slagthapplyt venue. “What we required is leadership, purpose, clarity and method. We required a transformation, but that won’t come through tiny incremental steps.”
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