Pension funds and banks are risking Europe’s security with “crazy” ethical investing rules that do not differentiate defence companies from illicit drug gangs, the head of Nato has said.
Mark Rutte, the alliance’s secretary general, said ESG (environmental, social and governance) rules, which use positive principles to decide where to invest savers’ money, deter investments in defence companies.
His view was echoed by a major bank that told The National there had been a “180 degree change” in how funders invested in the defence industry, which was no longer regarded as “socially squeamish”.
Speaking at an event at the World Economic Forum in Davos, Mr Rutte said they are “still are not able to explain to the pension funds, to the banks, the difference between illicit drugs and pornography on the one hand and spending on our collective defence on the other”.
“And somehow it’s all the same basket. This is crazy, but this is one of the reasons why I’m trying to reach out to the one billion people living in Nato territory and asking them: go to your banks and your pension funds and tell them that you want to be defended and you want them to spend more.”
Mr Rutte said Europe had to “make sure we can fight the Russians if they attack us”.
Paying their way
Major banking investors agreed with Mr Rutte that European defence spending needed to dramatically increase for industry to build the arms to deter the Russian threat.
Ben Heelan, co-head of EMEA aerospace and defence at the Bank of America global research, suggested that US President Donald Trump’s administration could drive all Nato countries to 3 per cent of GDP on defence, which would likely be announced at the alliance’s summit in June.
“The big focus under the new Trump administration is going to push Nato countries to pay their way when it comes to their own defences, even in terms of ESG,” he told The National.
European countries had been “very, very reliant” on the US for the past 15 years, producing very little in the way of tanks, artillery or aircraft that have proven critical in the Ukraine war. Some, such as Spain, barely achieved an earlier agreement of 2 per cent of GDP on defence.
There had been a “180 degree change” in the way major investors view defence that is leading to a revamp of the industry across Europe.
“In the conversations I have with people, whether it be clients, companies or leaders, it does feel that there's change happening in terms of how people are approaching defence,” he said, speaking at Bank of American headquarters in London.
'Not socially acceptable'
Previous big financial funds that he had dealt with between 2018 and 2021 had “written off defence” as it was “one of those industries that's not socially acceptable” with certain banks walking away from capital financing agreements.
“We’ve now just gone a full 180 degrees in Europe from a defence industry perspective, things are really changing,” he said, adding that people now considered a land war in Europe a “real threat”.
A key part to rearming Europe was for governments to provide defence companies with enduring contracts giving them the confidence to invest in infrastructure.
For example, the German government had contracted defence company Rheinmetall up to $12 billion over a decade for artillery shells “giving them the visibility they need to expand capacity” to invest in factories.
As a result, Rheinmetall will go from producing 300,000 155mm artillery rounds to 1.1 million by 2027.
“Nato and European nations have stepped up to the plate and improved and increased their investment but there's still more to go,” Mr Heelan told The National.
He added that the funders' attitude towards investing in “defence socially” had now changed substantially.
Destroying defence
His comments were echoed by François Michel, chief executive of Belgian defence manufacturer John Cockerill, who said ESG risked “destroying the European defence industry”.
“Clearly there is an issue with the ESG regulations on the financial side because, whatever the regulations we have in Europe in general, finance has been pushing the defence industry to sit apart from civilian infrastructure and from civilian activities,” he said.
“This is destroying the European defence industry, this is something we absolutely need to solve, and I fully agree with the fact that public spending is not the only answer.
“Private capital has to be able to flow efficiently between savings and companies.”
Gen Sir Roly Walker, chief of the General Staff for the British Army, sounded a similar warning at a defence event this week in Farnborough.
“We all have a responsibility to ensure defence is seen as both a noble endeavour to work for, and is ethical and profitable to invest in. Our way of life is, literally, sustained by such an outcome,” he said in a speech to troops and industry partners at the International Armoured Vehicle Conference.
The defence sector could play its part in advocating for the “moral case” of investment, he told The Times. “Environmental, social, governance standards view defence investments in the same company as adult entertainment, tobacco and gambling,” he added.
Mr Trump has for years expressed scepticism about Nato, openly questioning the value of the alliance that has defined American foreign policy for decades and threatening not to defend members that fail to meet defence-spending goals.
Mr Trump has said Nato countries should spend at least 5 per cent of their GDPs on defence, up from the current 2 per cent target.
Britain spends 2.3 per cent of GDP on defence and says it will increase it to 2.5 per cent.
