A European Model for Responsible Defence Financing
Debate needs to move beyond exclusions to support innovation in strategically significant technologies and industries, says Mirova CEO Philippe Zaouati.
Since its inception, sustainable finance has been built around a fundamental principle: investing for a better world by directing capital towards activities with a positive impact. Historically, the arms industry has been excluded from this approach, following the early responsible investment doctrines, which avoided certain sectors deemed controversial.
This exclusion has persisted and intensified in recent years, affecting not only the most committed ESG players but also a significant portion of the European financial landscape. Today, many financial institutions – from sovereign wealth funds to major banks and institutional investors – apply strict restrictions on defence financing, creating a situation where a sector essential to security and sovereignty is increasingly constrained in its access to private capital. Since the beginning of Russia’s invasion of Ukraine, the European financial industry has struggled to define a clear and transparent investment framework that would support solutions targeting defence and peacekeeping.
However, in a geopolitical context marked by rising tensions and threats to the sovereignty of democracies, this approach deserves to be questioned. Can we sustainably exclude the entire defence sector from responsible finance when the protection of populations and democratic institutions is a fundamental condition for any sustainable transition?
Historically financed by public budgets
Until now, the arms industry has been largely funded by public budgets, through taxes and state contracts. But like any economic sector, it also has private financing needs, whether in the form of equity, bonds, or bank loans.
While the major companies in the sector are currently well-capitalised and have drawn little from financial markets in recent years, the situation is quite different for small and medium-sized enterprises (SMEs), non-listed companies, and tech startups. These companies play a key role in innovation and the development of dual-use technologies for both civilian and military purposes.
The stakes thus go beyond merely financing armaments. It is more broadly about the capacity for innovation and investment in strategic technologies in Europe. At a time when the US and China are massively supporting their strategic industries, Europe cannot afford an investment deficit in such critical sectors.
Responsible finance for sovereignty
Far from being a hindrance, sustainable finance can and must be a lever for structuring responsible defence financing. This is not about opposing ecological transition and sovereignty, but about building a balanced approach that takes into account the realities of the contemporary world.
ESG has always been a tool for directing capital towards objectives of general interest. It must now be equipped with a framework that allows:
- Identification of segments of the defence industry that meet clear ethical and responsibility criteria, away from weapons banned by international conventions;
- Assurance of traceability of funding and transparency regarding the use of invested capital, to account for human rights risks in importing countries;
- Full integration of security issues into a broader vision of sustainable finance;
- Protection of human rights and contribution to the promotion of peaceful societies.
Today, the outright exclusion of the sector does not allow for the achievement of these objectives. On the contrary, it creates a financial blind spot on a subject that deserves regulation and collective reflection.
Responsible defence financing instruments
If, until now, the European Union, European states, and the listed defence industry have been able to finance themselves without difficulty, the announcements of an unprecedented rearmament effort since the fall of the Berlin Wall could necessitate a significant call for private funding to increase production capacities.
In the face of this challenge, sustainable finance can draw inspiration from the tools developed for ecological transition. The rise of green and social bonds has shown that it is possible to direct capital towards specific activities, ensuring a strict framework for fund allocation and impact monitoring.
In the same way, why not imagine European defence bonds, with funding directed towards projects of high strategic and technological stakes for European sovereignty? Such a framework would allow :
- Targeting investments towards critical innovations, particularly in dual-use technologies;
- Ensuring rigorous control over the use of funds, avoiding any financing of activities contrary to ESG principles;
- Engaging responsible investors in a proactive approach, rather than leaving them on the sidelines of such a central debate.
Regarding the essential fabric of innovative and/or subcontracting SMEs, it is evident that Europe faces a deficit in private financing. Its savings structure is not sufficiently oriented towards private equity funds. This deficit affects not only the defence industry but hampers all key industries for sovereignty. Therefore, global solutions must be envisioned to encourage private financing within the savings structure.
Rather than remaining stuck in an exclusionary approach, impact finance can play an active role in building a European model for defence financing that is transparent, ethical, and adapted to the realities of the 21st century.
A call for collective reflection
Far from questioning the principles of sustainable finance, this reflection aims to strengthen and adapt them to current challenges. The issue of sovereignty can no longer be ignored, as without security and stability, no ecological and social transition project can succeed. The stakes are not only about armaments but also about the place of responsible finance in building a sovereign and sustainable Europe.
It is time for financial actors, industrialists, regulators, and public authorities to come together to define the contours of responsible defence financing. This debate is essential, and ESG must have its rightful place in it.
This call repositions ESG at the heart of the debate, making it a lever rather than an obstacle, and emphasises the need for a structuring framework rather than a principle of exclusion. It calls for collective reflection by highlighting that the role of responsible finance must evolve in the face of new challenges.
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