From Defense Technologies to Sustainability: A New Arena of Competition in the Defense Industry

The European Green Deal is not just about wind turbines and electric vehicles. At its core lies a transformation process that redefines how companies operate, access financing, and approach risk management. The EU's Corporate Sustainability Due Diligence Directive (CSDDD / CS3D) stands out as one of the most powerful regulatory tools of this transformation, turning human rights and environmental due diligence from a "goodwill choice" for large companies linked to the EU economy into a legal obligation.

In this context, a critical question arises for non-EU suppliers such as Turkey's rapidly growing defense industry: How can tanks, unmanned aerial vehicles, and missile systems be made compatible with environmental, social, and governance (ESG) criteria and sustainable finance principles?

The European Commission attempted to provide a systematic answer to this question in its 2025 Communication on a sustainable finance framework for the defense sector and the implementation of the CSDDD. This Communication, together with the final text of the CSDDD, serves as a fundamental reference for understanding how the logic of the Green Deal intersects with the realities of "hard power."

Expectations Brought by the CSDDD and Its Impact on Companies

The CSDDD imposes an obligation on large-scale companies to conduct risk-based human rights and environmental due diligence throughout their supply chains. The concept of "supply chain" encompasses the company's own operations, its subsidiaries, and both upstream and certain downstream segments of the value chain.

The main elements of the Directive can be summarized as follows:

• Identifying, preventing, mitigating, and, where necessary, ending adverse impacts on human rights and the environment that occur or are likely to occur,

• Integrating these assessment processes into company policies, governance structures, and risk management systems,

• Establishing complaint and appeal mechanisms for affected stakeholders and providing access to remedy processes where necessary,

• Adopting a risk-based approach that prioritizes the most serious and most likely impacts, rather than scrutinizing the entire value chain with equal intensity.

The Directive has cross-border implications. It applies not only to EU-based companies exceeding certain size thresholds, but also to non-EU companies exceeding a certain turnover in the EU. Therefore, even if a Turkish defense company does not fall directly under the scope of the CSDDD, it will be indirectly affected by this regulation through contractual provisions (supplier code of conduct, audit rights, termination clauses in case of failure to comply, etc.) via its main contractors and customers in the EU.

A Special Area: The Defense Sector under the CSDDD and EU Sustainable Finance Rules

The defense sector has historically been one of the most controversial areas in terms of ESG. Weapons and defense systems have been classified as "controversial activities" by many investors and have often been completely excluded from sustainable funds. On the other hand, Russia's attack on Ukraine and increasing geopolitical tensions have created a strong political will in Europe to rearm and strengthen defense capabilities.

This dual dynamic has necessitated the European Commission to issue a specific Notice regarding the application of the sustainable finance framework and the CSDDD to the defense sector. Some key points in the Communication can be summarized as follows:

• It is emphasized that EU sustainable finance regulations (such as Taxonomy, SFDR) are not categorically incompatible with defense investments, but that defense activities can be accommodated provided they comply with international humanitarian law, human rights, and the principle of "do no significant harm."

• The aim is not to completely exclude the defense sector from access to finance, but to establish frameworks that determine which types of weapons, end uses, and customers are incompatible with sustainable finance products.

• The notice clarifies how the due diligence obligations under the CSDDD should be interpreted in the defense context, placing particular emphasis on areas such as end-use risks, operations in conflict zones, and the risk of diversion of weapons to third parties.

On the other hand, assessments by civil society organizations and research institutions indicate that the final text of the CSDDD contains some exceptions and ambiguities regarding the defense and arms sectors compared to the initial drafts; this could narrow the scope of mandatory due diligence for certain arms-related activities. However, this does not mean that pressure has been eliminated. On the contrary, some of the pressure will manifest itself through national implementation, export control regimes, and investor expectations.

ESG Expectations and Access to Finance Dynamics for the Defense Sector

From a finance and ESG perspective, the emerging framework consists of three main elements:

• CSDDD defines minimum due diligence standards for human rights and environmental impacts across the value chain.

• The EU sustainable finance framework (Taxonomy, SFDR, reference indices, etc.) determines when an investment can be called "sustainable" and what information investors are required to disclose.

• Guidance documents for the defense sector indicate that defense activities are not categorically excluded, but require strong safeguards and limits.

For defense companies and suppliers, this framework translates into concrete and measurable ESG expectations:

Robust due diligence in the areas of human rights and international conflict law

• Systematic assessments of end-user and end-use risks of products and services

• Enhanced screening processes for high-risk geographies and customers

• Contractual safeguards and intervention processes triggered when misuse is detected.

Environmental performance and life cycle approach

• Regulations on hazardous substance management, emissions from production processes, waste management, and end-of-life of products,

• Alignment of defense activities with the EU's long-term climate goals and company-based transition plans.

Traceability and transparency in the supply chain

• Higher expectations for transparency regarding the origin of critical inputs in the supply chain, production conditions, and supplier performance,

• Corporate reporting and documentation practices that demonstrate supply chain risks are being managed to investors and credit institutions.

When CSDDD and sustainable finance regulations are considered together, it can be said that ESG requirements have become a new competitive factor for the defense sector. Companies that can establish a robust human rights and environmental due diligence system will have easier access to credit facilities, sustainability-linked financing instruments, and specific ESG-labeled funds; those that lag behind in this area will face the risk of being squeezed into an increasingly narrow "non-ESG" financing pool.

Assessments of Turkey's Defense Sector

Turkey's defense industry has evolved from an import-dependent structure over the past twenty years to become a major global exporter. According to official data, defense exports reached approximately $5.5 billion in 2023, with numerous products and platforms exported to 185 countries. International databases show that Turkey's share in global defense exports rose from approximately 0.8% in the 2015–2019 period to 1.7% in the 2020–2024 period.

The European market is playing an increasingly critical role in this story. Defense exports to Europe are said to have nearly tripled in a short period of time, reaching US$1.2 billion as of 2023, accounting for approximately 22% of Turkey's total defense exports. This trend parallels the increasing operational and political importance of Turkish defense platforms, particularly unmanned aerial vehicles, within the European security architecture and NATO.

This scenario brings new risks along with opportunities. Turkish defense companies may become critical suppliers in the value chains of large European defense industry companies covered by the CSDDD. In this case, the European companies in question will need to demonstrate that they have a robust due diligence system that also covers suppliers outside the EU. Public buyers in Europe (defense ministries, government agencies, public companies) will be under increasing political and social pressure to demonstrate that their defense procurement does not conflict with the EU's human rights and environmental commitments.

In this context, three strategic outcomes stand out for Turkey's defense sector:

Transition from "Export Compliance" to a Comprehensive HREDD-Human Rights and Environmental Due Diligence Approach

Traditional export control compliance (licenses, end-use certificates, etc.) alone will not suffice. EU-based buyers and financial institutions are increasingly focusing on a human rights and environmental due diligence (HREDD) framework. This increases the importance of the following structures for Turkish defense companies:

• Systematic risk mapping for high-risk geographies and customers,

• Clear governance responsibilities for sustainability, ethics, and compliance,

• Complaint and incident management mechanisms,

• Documentation of steps taken by the company to prevent, mitigate, and, where necessary, review business relationships.

ESG as a Determinant of Market Access and Capital Costs

The fact that defense activities can be included in the EU sustainable finance framework under certain conditions means that the bar for the "acceptability" of defense investments has been raised. For Turkish defense companies, this situation can be summarized as follows:

• Companies with strong ESG and due diligence performance are more likely to receive support from European credit institutions and institutional investors.

• Weak due diligence and insufficient transparency could result not only in reputational risk, but also in increased financing costs, more difficult access to EU-funded programs and development finance, and the fragility of long-term partnerships with major contractors in Europe.

Strategic Opportunity: Positioning as a "Responsible" Non-EU Supplier

The new regulations create not only risks but also opportunities. Many non-EU defense exporters will struggle to comply with the CSDDD and sustainable finance standards. Turkey's defense companies can:

• Adopt practices similar to the CSDDD before they become a legal requirement,

• Integrate ESG and HREDD approaches into their governance structures, internal processes, and reporting,

• If they develop a transparent communication policy on risk management and mitigation measures,

They will have the opportunity to stand out as "CSDDD-ready, responsible suppliers" among major contractors and public buyers in Europe. This requires sustainability and due diligence to be treated as a strategic element that increases export competitiveness, rather than a response to external pressure.

The European Green Deal Framework Now Extends to the Defense Sector

Although the Corporate Sustainability Due Diligence Directive is not a text specifically written for the defense sector, it will have direct and indirect effects on the financing, management, and trade of defense activities. The guidance documents published by the European Commission clearly state that the defense sector is not completely excluded from the sustainable finance world; however, it must undergo much stricter scrutiny in the context of human rights, international humanitarian law, and environmental impacts.

The message for Turkey's defense industry is clear:

• ESG criteria and due diligence are increasingly becoming technical requirements for market entry; they are no longer just a matter of communication or reputation management.

• CSDDD creates a "pull factor" that also covers non-EU suppliers through contracts, financing conditions, and stakeholder expectations.

• Companies that can establish reliable human rights and environmental due diligence systems early on will be in a more advantageous position, supporting both long-term export growth and access to sustainable or sustainability-linked financing.

Considering all these effects, the future of defense exports to Europe will be determined not only by technical and commercial criteria such as range, transport capacity, and unit cost, but also by how "clean" the value chain is in legal, environmental, and ethical terms.