ESG funds in Europe could potentially boost investments in the defense industry if current restrictions are eliminated, as suggested by analysts from Morgan Stanley. Funds categorized as Article 8 and Article 9, which are the primary ESG disclosure groups in the European Union, could drive significant capital inflows ranging between $53 billion and $119 billion into the aerospace and defense sector. The analysts, including Arushi Agarwal and Rachel Fletcher, highlighted that any relaxation of exclusions might target conventional and nuclear weapons, potentially leading to substantial investment flows. There is a trend among fund managers focusing on environmental, social, and governance objectives to increase their holdings in defense assets. This trend aligns with a broader shift in investment outlook towards the defense industry, partly influenced by European policymakers responding to strained relationships with the US and mounting tensions from Russia's military activities. Currently, Article 8 and Article 9 funds have an average exposure of approximately 2% of the market cap of Europe's aerospace and defense sector, according to Morgan Stanley analysts. While the analysts advise caution in estimating the potential influx of ESG funds into the defense industry, they emphasize that changes in exclusion policies could take time. The analysts point out the significance of international treaties and their incorporation into national legislation, particularly concerning controversial weapons such as biological weapons and cluster bombs. However, Morgan Stanley's analysts highlight concrete steps taken by Europe to alleviate barriers hindering investment managers from increasing exposure to the defense industry, mentioning initiatives in Germany, the UK, and remarks from French Finance Minister Eric Lombard debunking the misconception that ESG regulations impede defense investments.