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Members of multinational artillery teams stand with an MLRS M270 A2 mobile rocket system during the NATO “Exercise Lightning Strike” on November 20, 2024, near Heinu, Finland. The live-fire exercise includes service members from 28…
Members of multinational artillery teams stand with an MLRS M270 A2 mobile rocket system during the NATO “Exercise Lightning Strike” on November 20, 2024, near Heinu, Finland. The live-fire exercise includes service members from 28 Allied and partner nations. European politicians want to be prepared in case NATO forces have to face Russia.
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European defense companies, especially smaller businesses, are being blocked from investment they sorely need by sustainability rules, a senior NATO official and several industry figures have said.
The claims come as NATO’s continental members urgently try to boost defense spending and production in the face of worrying moves from Russia, China, Iran and North Korea.
Europe’s financial sector “says it’s not ethical to invest in defense industry,” or to support “an industry that also produces things for the nuclear weapons in the world,” Admiral Rob Bauer, the outgoing chief of NATO’s military committee, said in an interview with Newsweek. “To those, I say, ‘Go to Syria, go to Gaza, go to Ukraine, go to Yemen. See what war does to a country, to a city, to people.'”
Admiral Rob Bauer, the outgoing chief of NATO’s military committee, said in an interview with Newsweek in December 2024, “Go to Syria, go to Gaza, go to Ukraine, go to Yemen. See what war does…
Admiral Rob Bauer, the outgoing chief of NATO’s military committee, said in an interview with Newsweek in December 2024, “Go to Syria, go to Gaza, go to Ukraine, go to Yemen. See what war does to a country, to a city, to people.” Pictured here: Private residential buildings destroyed or damaged by a Russian kamikaze drones’ strike on November 17, 2024, in Mykolaiv, Ukraine. In the early morning, the Russian army carried out a kamikaze drone strike on the city, resulting in the destruction of two and damage to at least five residential buildings; stores, non-residential facilities and vehicles. Two women were killed, one of whom was pregnant; seven more people were injured, including two children.
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Serhii Ovcharyshyn/NikVesti.com/Global Images Ukraine/Getty
Other investors are banned from buying defense stocks due to sustainability goals, the Dutch admiral added.
Institutional investors, especially in Europe, are often bound by ESG, or environmental, social and governance criteria. This is a set of rules to measure how environmentally friendly, socially responsible and transparent an organization is, and is used by investors to help judge where to—or not to—invest. Many major financial institutions publicly state they will not invest in defense companies because of the social part of ESG or on moral grounds.
Norway’s sovereign wealth fund, for example—with nearly $1.8 trillion in assets and holdings in over 9,000 companies—bans investments in aerospace companies like Airbus and Boeing due to their links to the production of nuclear weapons.
One prominent European defense industry official told Newsweek that ESG in Europe is “absolutely” playing into Russian hands in what is “already an extremely challenging situation for Europe.”
The official said they would “subscribe 100 percent” to the idea that ESG is
benefiting Russia, with restrictions binding European defense industry at “the worst possible” time.
“It’s a self-inflicted problem in Europe, you don’t see that in any other region of the world,” they said.
UK Military Defense Budget Lacks Public Support
Defense companies need investment to keep their programs running and to develop long-lasting technologies.
A spokesperson for U.K.-based BAE Systems, Europe’s largest defense contractor that is also on Norway’s banned list, said although it had a “strong and supportive investor base,” when funds don’t invest in defense, this “constrains industry’s ability to invest in skills and technologies.”
Projectiles for 30mm caliber ammunition are produced at the BAE Systems factory in Washington, near Newcastle upon Tyne in north-east England on November 8, 2023. BAE Systems is Europe’s largest defense contractor. The industry relies…
Projectiles for 30mm caliber ammunition are produced at the BAE Systems factory in Washington, near Newcastle upon Tyne in north-east England on November 8, 2023. BAE Systems is Europe’s largest defense contractor. The industry relies on funding to improve efficiency and innovate.
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OLI SCARFF/AFP/Getty
Swedish defense company Saab told Newsweek that exclusion criteria “is detrimental to progress in our industry, as well as to nations’ needs for a stronger defense capability.”
ESG ratings have “a big impact on the industry’s ability to finance investments and operations,” the company’s head of communication and sustainability, Viktor Wallström, said in a statement.
Europe’s defense industry must keep hold of long-term access to a cocktail of private and public funding to reach the capacity demanded of it by its customers, Wallström said.
There is a “long history” of defense stocks being banned from investment portfolios carrying sustainable labels, Mann Virdee, a senior research fellow at U.K.-based think tank the Council on Geostrategy, told Newsweek.
While the issue isn’t novel, the pressing need for the defense industry to pump out more equipment at the behest of European governments, is. Bauer’s comments come as NATO nations across Europe wrestle with bolstering defense spending, which dipped after the end of the Cold War.
NATO has a defense spending target of 2 percent of GDP for each member state. Several countries in the alliance still do not meet this, and there is a burgeoning feeling this will soon not be a high enough bar.
Political and military officials have overtly warned of the possibility of NATO engaging in a war with Russia, where roughly 40 percent of all
government spending is on its military.
In a recent report to the European Commission, former Finnish Prime Minister Sauli Niinistö said Europe’s stocks of main battle tanks fell by 77 percent between 1992 and 2022. The number of fighter jets fell by 57 percent in the same period and submarines by nearly half, Niinistö added.
Equipment may be more advanced now, but it could take decades to up the numbers after “years of underinvestment compounded by regulatory hurdles,” he said. Two former U.K. government ministers, writing last year in the British tabloid The Mail on Sunday, said it was “perverse” that with war raging in Ukraine, the defense sector was “being shunned.”
The ministers cited one survey as saying that roughly two in every five institutional investors reported rejecting or halting investments with asset managers due to ESG worries.
German President Frank-Walter Steinmeier (R), Finnish President Sauli Niinistö (C), Brigadier General Volker Samanns (L) attend a demonstration of the Jammer HP 47 unmanned aircraft systems (UAS) defense system at the German defense ministry in…
German President Frank-Walter Steinmeier (R), Finnish President Sauli Niinistö (C), Brigadier General Volker Samanns (L) attend a demonstration of the Jammer HP 47 unmanned aircraft systems (UAS) defense system at the German defense ministry in Bonn, western Germany on November 16, 2023.
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INA FASSBENDER/AFP/Getty
America’s View on Military Spending
The U.S. has a different culture and diverging rules. Several officials and experts described a much more reliable funding thread between the defense industry and the Pentagon, as well as a more ingrained sense that defense is a worthy investment.
“In the U.S., these issues are not as acute,” Oliver Cusworth, an official with the European Investment Bank’s defense and security office, said.
“Financing for the defense sector in the U.S. is very socially accepted and does not seem to have any of the same kind of ESG obstacles… as we have in Europe,” Cusworth added.
“In other countries, such as the USA, defense is seen as an essential ESG component, contributing to global stability,” a spokesperson for French multinational defense firm Thales told Newsweek. “Defense is one of the most regulated industries in the world. In this area, Thales operates in strict compliance with the sector’s most demanding ethical norms and standards.”
Niinistö, in his report, said the EU had to face down the “massive gap” in investment in defense technology that had opened up between the EU and the U.S., which spends up to 12 times more than the bloc.
Pre- and Post-Ukraine
Before February 2022, when Russian tanks rolled into Ukraine, investing according to ESG considerations was on the rise, and many defense companies “were shut out from large pools of capital,” said Virdee.
The European defense industry official said senior defense executives had been increasingly protesting a lack of access to funds several years before the outbreak of full-scale war in Ukraine. They identified banks, financial institutions and pension funds as the main stumbling blocks.
One banker described being under scrutiny from non-governmental organizations, the official said, which could “declare war against the bank” if defense stocks featured in their portfolio. In early 2022, attitudes “got even worse,” the official said.
The European Defence Agency, set up to organize the EU’s defense capabilities across member states, said last November that investment decisions from the finance sector were “subject to increasingly stringent ESG criteria.”
ESG regularly excluding defense firms “has wide-ranging negative consequences” for Europe, closing off the defense industry to talent, curtailing the number of potential investors and damaging the reputation of the sector, the EDA evaluated. But a U.K.-based fund manager specializing in sustainability told Newsweek that the significantly stronger valuations of defense companies since the Ukraine war has shown that ESG exclusions were not significant to their valuations pre-war.
Even before 2022, “no sensible person” questioned the value of defense companies, they said. While there should be ESG considerations in any investment, this would not preclude most funds from investing in defense companies, which have “lots of sources of money,” the manager said.
What Is ESG, and How Does It Apply to Military Investments?
ESG broadly means sustainability, but there’s no real clarity on how to define this when it comes to defense companies. The U.K.-based fund manager framed the concept as a combination of doing “no significant harm,” and making a positive contribution for society. Defense companies could fall easily into the latter, when looked at through a geopolitical lens, the fund manager said, but the former would be harder to establish.
Admiral Bauer doesn’t agree. “I find it baffling that there are still institutions and organizations who believe that investing in the defense industry somehow goes against the sustainability goals,” he said during an appearance at a defense summit in the Czech Republic last month.
“I can think of nothing more sustainable than preventing war,” he said.
Thales said that “there is no sustainability without security,” adding that European politicians were “very clear” that strengthening Europe’s defense is a priority. “It’s not a question of pitting one objective against the other,” the spokesperson said.
Admiral Rob Bauer, Chair of the Military Committee of NATO, addresses members of the German-French Brigade on July 10, 2023 at the Gaiziunai military training area in Gaiziunai, Lithuania.
Admiral Rob Bauer, Chair of the Military Committee of NATO, addresses members of the German-French Brigade on July 10, 2023 at the Gaiziunai military training area in Gaiziunai, Lithuania.
Tim Ireland/Getty
ESG Investing Prohibits Controversial Weapons
Furthermore, the financial sector will often exclude under ESG what it typically calls controversial weapons, usually a shorthand for weapons with the potential to do significant harm to civilians.
Scottish Widows, a major pensions provider headquartered in Edinburgh, Scotland, publicly states that it will not invest in companies that make or use “certain weapons [that] have been deemed unacceptable under international conventions.”
This includes chemical and biological weapons, as well as anti-personnel landmines and cluster munitions. London-based global asset management company Schroder has similar exclusions.
The Universities Superannuation Scheme, one of the biggest pension providers in the U.K., says it avoids investing in “companies that are involved in the development, production, stockpiling and transfer of cluster munitions” as well as white phosphorus and landmines.
Scottish Widows, USS and Schroder declined to comment further.
Despite various treaties, there is no internationally agreed definition of what a controversial weapon is.
“A lot of people stay away from defense investments because they are not entirely sure what might be controversial,” Wolf-Christian Paes, a senior fellow for armed conflict at the International Institute for Strategic Studies think tank, told Newsweek.
Some weapons listed as controversial have been used in Ukraine. The U.S. has provided cluster munitions and pivoted last month to send anti-personnel land mines to Kyiv.
The policy U-turn in Washington hits at the heart of the dilemma. These weapons are reviled among human rights advocacy organizations and can have lasting civilian impacts. But militarily, they’re deemed necessary to fight Russia’s vast army.
Estonia’s foreign intelligence service, for example, has warned that NATO could face “a Soviet-style mass army in the next decade” if Russia successfully reforms its military. While many countries have inked conventions banning or limiting the use of land mines and cluster weapons, there may be a moment where NATO’s European states look hard at whether these unsavory weapons could be crucial for its own defense.
Militarily, “land mines and cluster munitions are useful weapons,” said Paes. “If you’re fighting a defensive war, you need land mines to secure your lines. That has always been clear.”
Since the early 1990s, peace across Europe has allowed humanitarian concerns to be more thoroughly recognized, he noted. But now, approaching three years of the largest land war on the continent since World War II, there could be a “rollback” on the horizon, Paes suggested.
European Institutions
Before this May, European businesses proposing projects belonging to the defense and security sphere would only be eligible for EIB investment if they got more than half of their predicted revenues from civilian use.
While no longer the case, an EIB spokesperson confirmed that weapons and ammunition are still excluded from financing. Also on the bank’s exclusions list are explosives and equipment or infrastructure dedicated to military or police use.
“Because we are funded by investors…[from] across the world…we have to calibrate when we decide our policy, what it is that those investors will support,” Cusworth of EIB separately said in November.
Yet the pervasive attitude among other players in the financial sector, the European defense official said, was that if the EU’s investment bank isn’t willing to wholeheartedly back defense, why should large banks?
Smaller and Medium-Sized Defense Contractors Struggling to Find Funding
The EIB hopes to encourage the flourishing of smaller and medium-size businesses dotted along the defense supply chain, Cusworth said.
But defense SMEs are coming up against higher barriers to accessing finance than other sectors, the European Commission said in a report published in January this year.
Yet these companies “form the backbone of supply chains” and are vital to how secure the bloc can be, the Commission said.
The defense industry official said there had been one instance where a German defense company had tried to buy a specific type of machine tool from a commercial company, which refused to provide it.
The German government then waded in to grease the wheels, the official said, adding that this intervention would not have happened for a smaller defense company struggling to source components.
Although SMEs are getting hit harder, bigger defense firms will soon feel the brunt, too. “It’s a broad problem,” the European defense industry official said. However, the fund
manager cautioned that SMEs are generally high-risk investments anyway, which could be a factor in why it is harder for them to secure funding.
Rating Agencies
Typically, companies get credit ratings when looking for capital, which are essentially opinions—including on ESG—that help investors make decisions.
One person with knowledge of the credit ratings process told Newsweek that many big defense names have relatively high ratings, meaning they have access to capital, something smaller companies in general often have a tough time getting hold of.
Ratings agencies also evaluate government’s sovereign ratings, which looks at their ability and willingness to meet their financial obligations in full and on time. Generally, that includes looking at government spending, debt levels and the growth outlook.
Upping defense spending can negatively impact a sovereign rating, but any possible economic boost from defense will also be woven into the rating, the person said.
In a panel discussion last month, Bauer said that EU and NATO leaders should “talk to the ratings agencies about the fact that now an investment in defense has a negative impact on your credit rating.”
“It should be the other way around,” Bauer said. “Investing in defense should be treated the same as investing in measures that limit climate change.” Newsweek reached out to three major ratings agencies identified in conversations around ESG and defense: Fitch Ratings, Moody’s, and S&P. Moody’s did not respond to repeated written requests and S&P declined to comment.
Sustainable Fitch, part of the Fitch Group established in 2021, told Newsweek it has no company with “controversial weapons” activities in its ESG Ratings portfolio, using the definitions provided by the Sustainable Finance Disclosure Regulation and the U.N. Office for Disarmament Affairs.
Investors lean heavily on ratings agencies as part of their due diligence, Saab’s Wallström said. “The issue with this is that the different ESG rating companies use very different methods for analyzing sustainability risks and opportunities,” Wallström added. “What we can see is that they use different methodologies, criteria and data, which in turn means that Saab receives higher ratings with some rating companies, and vice versa.”
“When possible, we engage with ESG rating agencies regarding their assessments of our business, which form the basis of many investors’ exclusion lists, and endeavor to address any questions they or investors may have,” a spokesperson for Lockheed Martin, one of the world’s largest defense firms, told Newsweek.
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Publish date : 2024-12-18 08:17:00
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