EU rules on ethical investing are blocking almost £100bn of funds from flowing into the defence industry amid a push by Britain and Europe to bolster military spending.

Analysts at investment bank Morgan Stanley said regulations introduced by the EU four years ago had blocked “ethical” funds from investing in weapons. They said billions could be unlocked for European and UK defence if the rules were overturned.

The EU’s sustainable finance rules restrict environmental, social and governance (ESG) funds from investing in the defence sector.

However, Morgan Stanley said relaxing the rules could allow Europe’s ESG funds to invest billions in the UK and EU as they push to bulk up their own defences amid Donald Trump’s threats to withdraw US support for the Ukraine war.

Specifically, the analysts said easing rules for so-called Article 8 and Article 9 ethical funds – which are sold on the basis they do not contain weapons makers – could unleash up to $119bn (£92bn) worth of investment for the global aerospace and defence industry, if weapons investments were allowed.

These funds do not put money into weapons companies on ethical grounds and there is about $8.7 trillion within these funds. Of the sums invested by Europe’s ESG funds, just $10bn goes to defence.

Ben Wallace, a former British defence secretary, called for the EU rules to be relaxed to help boost investment in the military sector.