The City of London is preparing to channel significantly more capital into defence as rising geopolitical tensions, and the growing threat posed by Vladimir Putin’s Russia, force a rethink of long-held investment priorities.
Almost two-thirds of senior financial services leaders expect spending on Britain’s military capabilities to increase over the next year, according to new research from KPMG. More than a quarter of respondents believe defence investment will rise “much more” in the next 12 months.
The findings mark a sharp pivot for the City after years in which environmental, social and governance (ESG) investing dominated boardroom thinking and defence was often treated as an ethical red line. That position is now rapidly eroding as security concerns move to the centre of economic and financial stability planning.
Karim Haji, global and UK head of financial services at KPMG, said growing geopolitical risks had made it increasingly unrealistic for investors to avoid the defence sector.
“These findings point to a growing recognition that national security, geopolitical alignment and market integrity are now inseparable from the stability of the finance sector,” he said.
The shift comes amid increasingly stark warnings from western leaders. Earlier this month, NATO secretary-general Mark Rutte warned that Russia could be in a position to attack a Nato member state within five years, citing Moscow’s escalating covert and cyber activity across Europe.
“Russia is already escalating its covert campaign against our societies,” Rutte said. “We must be prepared for the scale of war our grandparents or great-grandparents endured.”
Putin has denied plans to wage war against Europe, but said Russia was prepared to act “right now” if it felt threatened.
Against this backdrop, City leaders ranked defence investment as their top strategic priority for the year ahead, ahead of preserving central bank independence in the fight against inflation and improving regulatory cooperation between the UK and the US.
Almost four in 10 respondents said increased spending on national security was essential to safeguarding financial stability in 2026, reflecting concerns that prolonged conflict or escalation could have systemic economic consequences.
The survey also highlighted unease about vulnerabilities elsewhere in the financial system. More than a quarter of executives flagged private credit, often described as “shadow banking”, as a growing risk, with trillions of pounds of lending now held outside traditional, highly regulated banks. A further 22 per cent called for tougher scrutiny of non-bank financial institutions.
Haji said the rapid expansion of private credit markets, combined with their limited transparency, could amplify shocks during periods of extreme stress.
“These markets now sit at the heart of corporate funding, yet they are less tested in a crisis than traditional banks,” he said.
Taken together, the findings underline a fundamental change in how the City views defence, security and risk. What was once seen as incompatible with responsible investment is increasingly being reframed as essential to economic resilience — and investors are positioning accordingly.
