StepStone Group- Nato Innovation Fund Q&A

Q&A

Responsible use in dual-use technology and defense investing

Suzanne Tavill, Global Head of Responsible Investment at StepStone Group

Brooke Latham, Head of Sustainability at the Nato Innovation Fund (NIF)

Suzanne Tavill, Global Head of Responsible Investment at StepStone, joins forces with Brooke Latham, Head of Sustainability at the Nato Innovation Fund (NIF) to explore the challenges & opportunities of investing in the defense sector & dual-use techContents

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Dual-use technology and responsible investing in defense

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Investing responsibly in dual-use technologies requires a shift from traditional ESG “checklist” approaches to more nuanced, proactive frameworks.

Responsible use is key: Early engagement and clear governance structures are essential.
Geopolitics matter: Evolving threats require a rethink of what qualifies as “responsible” investment.
Asset owners need to shift: Static exclusion lists don’t address the complexity of modern defense and security.

Suzanne Tavill, Global Head of Responsible Investment at StepStone, joins forces with Brooke Latham, Head of Sustainability at the Nato Innovation Fund (NIF) to explore the challenges and opportunities of investing in the defense sector and dual-use technologies, focusing in particular on the concept of responsible use.

Suzanne: Welcome, Brooke. You joined NIF in January 2024 to lead its efforts on sustainability, climate security, and responsible use—and today we'll be focusing on the latter. Can you start with a bit of color on the Fund?

Brooke: Of course. NATO set up NIF in 2023, and we’re now deploying EUR1B across 24 of the 32 member states. We’re also investing in dual-use technologies—those that can be deployed both for civilian and military purposes—to address some of the most critical challenges across defense, security, and resilience.

Suzanne: Defense—and defense spending—has certainly been in the spotlight since the war in Ukraine, the ramping up of China's military spend, and the re-election of Donald Trump. Given your interesting position in this ecosystem, where are you seeing defense forces spending their money and how is that influencing NIF’s focus?

Brooke: Over the past two years alone, we’ve seen a rapid increase in interest from the innovation ecosystem—particularly from governments and venture capital—and a shift away from the old taboo around investing in defense.

NATO set up NIF to keep that technological edge and bolster our collective security across NATO. That has definitely been highlighted by the war in Ukraine, where the most obvious example is the use of unmanned systems such as drones or uncrewed ground vehicles. And the issue of defense security resilience goes beyond what's happening on the battlefield itself, especially in Europe, where we've felt this in the form of energy security. So, it’s still vital that we invest in a sovereign, secure energy system for Europe.

Another growing area is space, particularly in terms of dual-use technologies, where satellite technology like Starlink provided troops in Ukraine with high levels of access and capabilities.

Suzanne: I love the fact that you mentioned Starlink, because this really epitomizes what we're talking about with dual-use technology. For me, it really hit home that one of the first things Zelensky requested was that the Starlink platform be kept activated to support both military and humanitarian operations during the Ukraine war.

One thing that I found really interesting when I started to look more closely at dual-use technology was just how much time the military had spent on developing a framework of ethical thinking and ethical behavior around this. And that’s very much reflected in some of the work NATO has done around responsible use. Can you talk us through that?

Brooke: When NATO created its AI and autonomy strategy back in 2021, it also established six high-level principles to ensure that any technologies are designed, developed, and deployed safely for end users, operators, and society as a whole.

And many of the large tech organizations, including Google and Microsoft, have since put together their own set of principles to govern these same issues. I’ve been working with NATO on using those principles to guide entrepreneurs and startups to ensure they're building responsibly.

Many of the traditional ESG frameworks tend to be very “checklist” in nature, asking questions such as whether the company has a code of conduct or an ethics policy. But when we’re talking about dual-use technologies, these questions only scratch the surface of the actual risks involved.

That’s why we wanted to focus on building a framework that can analyze the technical risks, while also understanding the difference between use-cases. And a big part of this is the governance around risk identification and risk mitigation.

Suzanne: Yes, in your recent paper, Responsible investing in Defense, Security and Resilience, you make the point that ESG checklists just don’t cut it. So when you’re developing a technology or application, how do you embed good systems and processes to ensure that it’s being built in a highly responsible way?

Brooke: It’s about more than just designing products responsibly; it’s about designing a capability and putting design parameters around it to make sure that a technology can only ever be used for its original purpose.

Take the example of drones, which could be deployed for purposes from intelligence and reconnaissance to border control and maritime surveillance. Doing due diligence from a responsible use perspective is mostly about the test, evaluation, verification, and validation (TEVV) process.

So, you want to understand where the training data and the security around it are coming from. Where are the feedback loops? How are any issues or risks being identified and mitigated? Does the company have a risk register and what is the governance structure around it?

As we move away from ESG, this is about understanding that any risks around responsibility are embedded into the product design and therefore into the business. This should be seen as a core strategic advantage, because if something goes wrong, it not only has a huge impact on use-cases, but it also could tank the business if it represents a significant enough risk.

Suzanne: And this focus on TEVV obviously echoes the best-practice frameworks around AI implementation that are emerging from the National Institute of Standards and Technology in the US.

Just going back to the topic of drones, the speed at which these drones can now travel, identify a target, and move into action is so fast that humans are increasingly being left out of the decision loop. What’s your take on that?

Brooke: I think the conversation around this very important topic—at least from a political and international law perspective—is moving on from whether humans are in or out of the loop to where accountability lies, and where in the process a human is responsible for the decision to use lethal force.

Suzanne:Let’s move on now to the role of asset owners. Traditionally, these groups have treated defense stocks as “sin stocks”, along with tobacco and gambling, and have opted either to exclude or screen them out to stay aligned with their ethical stance.

But it's interesting that the position around defense or weaponry was taken as way to exclude versus the position of peacekeeping or enabling security. I know you've done a lot of work to look at how asset owners are thinking about this sector today?

Brooke: When we published our paper on exclusion lists, we mentioned that investing in the defense industry, which is upholding peace and security and Western democracies, shouldn't be excluded, but should instead be done responsibly.

For instance, a bank may say that if a company has any dual-use or contracts with the defense industry, they would not be able to open an account. And as you mentioned, this is no longer just a game of the primes in the changing nature of warfare, because many of the solutions are coming from innovative startups. So, if these companies can’t open a bank account or get a loan, it slows down their operations.

I think the political will and political pressure to invest more in defense over the past year has seen a lot of the larger institutions starting to change their policies to allow for more flexibility. That said, the financial industry is just not keeping pace with the political will right now, so we need to find a way to bring them along too.

Suzanne: Exactly, and your findings mirror what we found when we wrote our whitepaper, Dual-use technology: Rewriting the rules of engagement. Some exclusions specify weapons, others specify the defense sector, and a growing number specify “controversial weapons”—typically biological, nuclear, and chemical. But even excluding controversial weapons is problematic, because there's no one neat definition of what this actually means. And this lack of clarity makes it harder to actually execute on exclusions, and could even leave the asset owner inadvertently in violation of its own policies.

The other thing that worries us is the same groups that are still focused on the exclusion angle can simultaneously be very heavily deploying across the technology space—and getting quite a substantial exposure to defense in the process. For example, many asset owners have exposure to Microsoft and Starlink—both critical platforms for running the entire Ukraine war.

So, asset owners should also have a parallel, more positive approach to driving responsible use—by engaging with their investment managers, underlying portfolio companies, or assets on topics like governance, development processes, and embedding responsible practices in companies from birth through to growth.

Unfortunately, this type of thinking around positive engagement on these topics is still relatively nascent and people are still very attached to exclusion criteria, regardless of the flaws of this approach.

Brooke: I definitely agree. Even for companies that manufacture composites or build autonomous vehicles, we still need to ensure they are considering issues like energy transition and climate risk. All of these companies should be held to the highest environmental standards, their water usage, governance for risk management and then additionally responsible use—especially when AI and autonomy are involved.

This is even more important from the perspective of venture, with its move-fast-and-break-things mentality. But that approach doesn’t work for the defense industry, because the risk is just too high. So, how do we help these companies scale and grow to address the need from the perspective of defense security resilience? Even more importantly, is engaging positive to make sure that there is the right governance, risk management, and mitigations for responsible use at the same time.

Suzanne: You’ve highlighted some very important topics that the defense and investment communities really need to get to grips with. The risks of getting this wrong are really scary, but the opportunity to get it right should mean far more embedded responsible behaviors and, ultimately, greater security.

“Even specifically excluding ‘controversial weapons’ is problematic, because there's no one neat definition of what this actually means. And this lack of clarity makes it harder to actually execute on exclusions, and could even leave the asset owner inadvertently in violation of its own policies.”

Suzanne Tavill

Brooke Latham

Brooke leads NIF’s sustainability, responsible-use and climate-security strategy. She is responsible for implementing these strategies for direct and indirect investment, supporting the portfolio to develop best-in-class practices, and the firm’s operations.

Brooke has a background in sustainable finance and international relations. Prior to joining NIF, she was Director of Climate & Impact at a French VC and before that she worked for Sonen Capital an impact fund-of-funds focused on emerging markets. Brooke started her career in Central America in impact investing and supporting the growth of the regional ecosystem.

She has a BA in Political Science and International Relations and an MBA from Esade Business School. Outside of work, Brooke is a certified mindfulness meditation teacher, loves being outdoors, and can be found skiing or running in the mountains.

Suzanne Tavill is the Global Head of RI at StepStone, as well as Chair of the firm's RI Committee and a member of its Enterprise Risk Committee and Charitable Giving Oversight Committee. She is also Chair of the PRI’s Private Equity Advisory Committee (PEAC) and a member of the EDCI's Steering Committee.

In addition, Suzanne is an active participant in the working groups of organizations including the PRI Global Policy Reference Group; the PRI Private Markets Human Rights Working Group; Invest Europe; the Institutional Investors Group on Climate Change (IIGCC); and initiative Climat International (iCI).

Prior to joining StepStone, Suzanne was Head of Alternatives at AMP Capital, responsible for the private equity, infrastructure, and real assets programs. Before that, she spent five years at Van Eyk Research in Sydney, with the last four as head of research. Before moving to Australia, she was an executive director at Goldman Sachs Asset Management, London, where she covered small and mid caps across Europe and was the portfolio manager for the UK small- and mid-cap portfolios.

Suzanne received a Master of Science in Finance and Economics from the London School of Economics, in addition to a Bachelor of Business Studies with Honors in Economics and Honors in Finance from the University of Cape Town, South Africa.