Defence, financials and companies involved in the build-out of artificial intelligence (AI) delivered standout performances in 2025, but the environmental, social and governance (ESG) issues attached to them (manufacturing weapons, financing the oil and gas sector and driving energy consumption to name a few) mean they aren’t obvious fits for sustainability‑minded funds.
Yet rigorous analysis and active engagement do allow sustainable funds to participate responsibly in these major market trends, according to Hamish Chamberlayne, co-manager of the £1.7bn Janus Henderson Global Sustainable Equity.
“Our mission ultimately is to grow and compound our clients’ wealth by investing in businesses that are aligned with the transition to a more sustainable global economy,” he said, noting that the fund considers both financial materiality and sustainability in equal measure.
On the sustainability side, he looks at 10 themes spanning environmental and social factors, with viable investee companies needing to have at least 50% revenue alignment with these themes. Once invested, active engagement with holdings ensures transparency and addresses any concerns. The fund engaged with 54 companies last year.
“Engagement is one of the main tools [sustainable fund managers] have to understand the risks around our investment exposures,” Chamberlayne said.
Ultimately, no sector is black and white, requiring each investor to decide where to draw the line. Below, Chamberlayne and Naomi Waistell, emerging markets manager at Carmignac, explain how they are currently navigating some of the most financially lucrative but sustainably controversial sectors.
Artificial intelligence
AI was the defining market theme of 2025 (and this is set to continue into 2026), clearly contributing to sustainable goals such as digital inclusion, yet raising growing concerns about the soaring energy consumption required to power its rapid expansion.
Data centres already consume around 2% of global electricity. As AI demand accelerates, the need for power will rise – posing practical challenges for power grids and the ongoing global energy transition away from fossil fuels.
“We have had to recalibrate in terms of [the opportunities] we are looking at,” said Chamberlayne.
The Janus Henderson fund is investing in companies participating in the AI infrastructure build out and improving energy efficiency and renewable sources.
One such company is Magnificent Seven stock Nvidia, a long-term holding for the fund.
“Nvidia’s GPUs have logged huge increases in [energy] efficiency over time, which has reduced the energy-related costs of training these large language models by vast amounts,” he said.
The fund is also invested in companies contributing to global electrification, such as Schneider Electric.
“These are important both from the perspective of serving the power needs of AI and for upgrading the power grid to ensure we can connect more renewable generation to grids around the world,” said Chamberlayne.
Emerging markets, in particular, typically attract less capital from sustainable funds due to weaker ESG disclosure, higher perceived risk and less reliable data.
For Waistell, AI and ESG in emerging markets “aren’t incompatible, [but] there is tension there”.
“On the face of it, a company like TSMC is pretty capital intensive and uses quite a lot of energy – however, if you look on a lifecycle basis, the efficiency of the technology that it enables far offsets the capital intensity it generates,” she said.
“As TSMC makes [the AI roll-out] more energy efficient, we believe [the company is sustainably] beneficial over the longer term.”
Defence
Even as defence spending booms in response to rising geopolitical instability, the sector’s ties to weapons production mean sustainable funds must tread carefully despite its market appeal.
Regulators in both the EU and UK have issued clarifications that defence is not inherently incompatible with sustainable investment regulation frameworks.
At an industry level, new initiatives are in the works to help investors and other stakeholders navigate responsible investment in the defence sector. For example, the Principles for Responsible Defence Investment initiative aims to produce practical guidance for integrating ESG and human rights standards in defence-related investments.
However, the waters are currently murky and so the extent to which a sustainable fund can and will invest in the defence industry remains up to the manager.
Chamberlayne and Waistell both said they don’t invest directly in the defence sector and have strong exclusions in place for their funds.
“There are companies in our portfolio that have exposure to the defence industry but we are careful to ensure that they are not making bespoke products for weapons,” said Chamberlayne.
The fund has an explicit exclusion around controversial and conventional weapons, with a 5% revenue limit for any portfolio company.
Waistell said: “It can be very difficult to get a true sense of every single end market but we don’t invest in any companies that are getting a significant portion of their revenue […] from any government globally. Those would be screened out of our universe.”
However, the growing use of AI and other technologies in defence adds another layer of complexity, requiring sustainable fund managers to assess not just the ‘traditional’ companies involved in the industry but also the tech firms whose innovations may feed into military systems.
“Some of the tech companies we invest in do include the defence sector as an end market,” said Chamberlayne.
For example, portfolio holding Keysight Technologies manufactures electronic testing and measurement equipment and has some exposure to the aerospace and defence sector.
“It is not in the business of making bespoke machines for weapon manufacturing but there are defence companies that will want to use its products for their own purposes,” he explained. “We engaged with the company to find out the nature of the technology used by the defence sector and received reassuring answers on that. For us, it is about the intentionality of the design.”
Another portfolio holding – tech behemoth Microsoft – also has some exposure to the defence industry.
“We have engaged with Microsoft multiple times over the past several years on a variety of ESG topics including its exposure to [the defence industry] so we can understand the level of its involvement and where it draws the line with regards to that involvement,” said Chamberlayne.
“We have always received transparency from Microsoft on this and that has given us the confidence to invest in them.”
Microsoft has strategic partnerships with the likes of BAE Systems and the Defence Science and Technology Laboratory (Dstl). The former focuses on using cloud technology to streamline the development, deployment and management of digital defence capabilities. Meanwhile, Microsoft’s work with Dstl is a collaboration between AI experts on the ethical adoption of AI within the defence sector.
However, risks of misuse remain. Last year, the company announced a formal review of allegations reported by The Guardian relating to the usage of its cloud computing platform Azure by a unit of the Israeli Defense Forces. Microsoft then disabled certain cloud and AI services for that unit.
Financials
Banks were also among 2025’s standout performers, yet their lending to the coal industry and other fossil-fuel activity places financials firmly in the ESG grey zone.
Chamberlayne said he has historically screened out banks with material coal exposure, instead favouring insurers – while recognising insurers also must improve disclosures on investment exposure to carbon‑intensive assets.
“The main tool we have is to engage and do our due diligence and ensure that insurers are aware of the risks around investment exposure to the fossil fuel sector,” he said.
In addition, the Janus Henderson fund leans into financials-adjacent names like credit bureau Experian. Chamberlayne noted that its wealth of proprietary data makes it a “strong economic moat” as the AI surge continues.