The City of London is preparing to pour significantly more capital into defense as rising geopolitical tensions and the growing threat from 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 next year, according to new research from KPMG. More than a quarter of respondents believe defense investment will increase “much more” over the next 12 months.
The results mark a significant turning point for the city after years in which environmental, social and governance (ESG) investments dominated boardroom thinking and defense was often viewed as an ethical red line. This position is now rapidly diminishing as security concerns become the focus 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 defense sector.
“These results indicate a growing recognition that national security, geopolitical alignment and market integrity are now inextricably linked to financial sector stability,” he said.
The change comes against the backdrop of increasingly clear warnings from Western heads of state and government. Earlier this month, NATO Secretary General Mark Rutte warned that Russia could be able to attack a NATO member state within five years, citing Moscow’s escalating covert and cyber activities across Europe.
“Russia is already expanding its covert campaign against our societies,” Rutte said. “We must be prepared for the magnitude of the war that our grandparents or great-grandparents endured.”
Putin has denied plans to wage war against Europe but said Russia was ready to act “immediately” if it felt threatened.
Against this backdrop, city leaders ranked defense investment as their top strategic priority for the coming year, ahead of maintaining the central bank’s independence in the fight against inflation and improving regulatory cooperation between the UK and the US.
Nearly four in 10 respondents said increased national security spending was essential to maintaining financial stability in 2026, reflecting concerns that a prolonged conflict or escalation could have systemic economic consequences.
The survey also highlighted concerns about vulnerabilities elsewhere in the financial system. More than a quarter of executives cited private lending, often referred to as “shadow banking,” as a growing risk as trillions of dollars in loans are now held outside traditional, heavily regulated banks. Another 22 percent called for stricter controls on non-bank financial institutions.
Haji said the rapid expansion of private credit markets combined with their limited transparency could amplify shocks during times of extreme stress.
“These markets are now at the heart of corporate finance, but are less tested in a crisis than traditional banks,” he said.
Taken together, the results highlight a fundamental shift in the way the city views defense, security and risk. What was once considered incompatible with responsible investing is increasingly seen as essential to economic resilience – and investors are positioning themselves accordingly.
