Kenfo, which was established in 2017 with initial capital of 24,1 billion euro, is tasked with generating sufficient long-term returns to finance the interim and final storage of radioactive waste from German nuclear power plants. The fund — whose full name is the «Fund for the Financing of Nuclear Waste Management» — currently manages around 25,6 billion euro.

A strategic shift is now underway: the sovereign fund is largely lifting restrictions on investments in shares and bonds of defence companies. «For liquid assets, such as equities or bonds, Kenfo is now also allowed to invest in defence companies,» Anja Mikus told Bloomberg. Previously, companies generating more than five percent of their revenue from defence activities were off-limits.

Geopolitics driving a rethink

«We still consider defence to be non-sustainable, but it has become necessary due to the changing security environment,» said Mikus. «Germany cannot increase its defence spending — while we as a German sovereign fund refuse to engage with the sector.»

For a long time, many investors, asset managers and banks in Europe avoided weapons manufacturers, partly for reputational reasons. However, Russia’s war of aggression against Ukraine and uncertainty over the future role of the United States within the NATO alliance have led to a shift in thinking.

Switzerland as a target

According to Mikus, who served for several years on the supervisory board of Commerzbank, the new investment scope for equities and bonds applies to companies from the European Union, as well as the United Kingdom, Norway and Switzerland. This is also linked to certain minimum standards in export controls. Investments in companies that produce controversial weapons such as cluster munitions will remain prohibited, she added.

«I expect that by mid-year we will have built up a higher exposure to defence,» said Mikus.

Mikus emphasised that Kenfo has not been given a «promotion mandate» to buy defence-related stocks and bonds. What matters for the fund is its foundation objective and the long-term average return it must achieve. However, the new rules broaden the range of companies it is allowed to invest in.

Decision lies with asset managers

«We have now entered into discussions with our external asset managers,» said Mikus. «They will decide whether investments in defence make sense from a return perspective. For example, many stock prices in the defence sector are currently at extremely high valuation levels.»

In illiquid assets, such as private equity investments, Kenfo had already been permitted in the past to invest in companies generating more than five percent of their revenue from defence. However, investment opportunities in this area are relatively limited.