Take a look at event handlers.
eventhandler.referenceinsertion.class = org.apache.velocity.app.event.implement.EscapeXmlReference
Escape tool is a production ready as well if you need to escape only selective references (final version of tools was released just recently but it was in beta stage before that for 2 years if not longer)
$esc.xml($var)
How to init velocity tools.
Include velocity-tools.xml into your project and enable required tools:
<tools>
<data type="number" key="TOOLS_VERSION" value="2.0"/>
<data type="boolean" key="GENERIC_TOOLS_AVAILABLE" value="true"/>
<toolbox scope="application">
<tool class="org.apache.velocity.tools.generic.AlternatorTool"/>
<tool class="org.apache.velocity.tools.generic.DisplayTool"/>
<tool class="org.apache.velocity.tools.generic.MathTool"/>
<tool class="org.apache.velocity.tools.generic.NumberTool"/>
<tool class="org.apache.velocity.tools.generic.ComparisonDateTool"/>
<tool class="org.apache.velocity.tools.generic.ClassTool"/>
<tool class="org.apache.velocity.tools.generic.ConversionTool"/>
<tool class="org.apache.velocity.tools.generic.EscapeTool"/>
<tool class="org.apache.velocity.tools.generic.FieldTool"/>
<tool class="org.apache.velocity.tools.generic.ListTool"/>
<tool class="org.apache.velocity.tools.generic.ResourceTool"/>
<tool class="org.apache.velocity.tools.generic.SortTool"/>
</toolbox>
<toolbox scope="request">
<tool class="org.apache.velocity.tools.generic.LoopTool"/>
<tool class="org.apache.velocity.tools.generic.ContextTool"/>
<tool class="org.apache.velocity.tools.generic.LinkTool"/>
<tool class="org.apache.velocity.tools.generic.RenderTool"/>
</toolbox>
</tools>
Then velocity context creation procedure would look like:
ToolManager velocityToolManager = new ToolManager();
velocityToolManager.configure("velocity-tools.xml");
VelocityContext context = new VelocityContext(velocityToolManager.createContext());