The European Commission has allocated EUR 1.5 billion for defence financing and some are calling for EUR 100 billion defence spending over the next years to shift Europe into a ‘war economy mode’. Furthermore, on 10 March, the European Investment Bank (EIB) approved a plan to mobilise investments amounting to EUR 6 billion by 2027 in support of Europe’s dual-use security and defence systems; dual-use indicating the potential for both civilian and military applications.

Just a week later, 14 national governments reportedly sent a letter to the EIB to enhance its financing for defence, and to allegedly go beyond dual-use investments despite the EIB’s policy ofexcluding the financing of any weapons, ammunition, explosives, as well as equipment or infrastructure dedicated to military/police use. Earlier this year NATO Chair of the Military Committee, Admiral Rob Bauer, called on NATO members and the defence industries to step up their commitments and to enter a public-private cooperation to meet the military’s needs to prepare for all eventualities.

Private spending

It is a fair question whether it is a lack of solidarity when financial institutions and investors do not support the national and supranational defence industry in times of ongoing and looming conflicts, to defend our freedom or help others to defend theirs.

Data gathered by NGOs shows that many private financial institutions and investors are already widely involved in the defence industry. According to the Armed Bank Campaign, banks, insurance companies, investment funds, sovereign wealth funds, pension funds and public institutions have supported the defence industry with more than USD 959bn during 2020-2022. Shares constituted more than half of the total investment in the sector (USD 660 billion), while bonds represented less than 1% of the total.

Triodos Investment Management, however, takes a clear stance against investing in the defence industry. As an impact investor, we are committed to strict minimum standards, requiring us to exclude all types of weapons, as well as key components or key services for weapon systems, from our investment portfolios. Our role is to channel capital to companies and projects that create lasting positive social and environmental impact, not to companies that provide weapons that are built to kill and destroy. As the stock prices of weapons companies are currently being driven up by ongoing geopolitical conflicts, investing in weapons means profiting from war and destruction. To us, that is an unethical choice.

Government responsibility

As part of their budget allocation and public finance strategy, national governments spend money on military forces and activities. The Stockholm International Peace Research Institute (SIPRI) maintains a military expenditure database, which contains data on the military spending of countries for the period 1949–2022. For 2022, SIPRI reported that countries’ military expenditure amounted to just over USD 2,240 billion in 2022, which is the highest level ever recorded since SIPRI started tracking military expenditure. Even if these figures dwarf those of financial institutions’ support for the defence industry – note that the government figures include overall military spending, including salaries for military personnel – financial institutions’ ties to the defence industry should not be underestimated.

The above-mentioned data clearly shows that governments have capital available to spend on the defence industry and are at liberty to decide on the budget allocation for the defence sector. In times of urgent capital needs for the defence sector, governments can even adjust their budgets by freezing government hiring, increasing taxes or raising debt and turn to a war economy as we currently see with countries involved in armed conflicts. Central banks act as the banker to governments and can meet financing needs by printing money, taxing or borrowing. Moreover, legislative measures enable governments to redirect financing to emergency needs. 

Dangerous shift

Governments thus have ample opportunities to raise funding for national defense and security interests. But if distorted national budget priorities endure, a permanent war economy could be the consequence as societies become economically dependent on war, while the option for peaceful diplomacy in the postwar era erodes. In addition, it is important to highlight that defence companies profit from armed conflicts and wars, as these create revenues from heightened military expenditures. And they also profit from private investments, as investor demand drives companies’ share prices up and reduces their own cost of capital.

It is thus no surprise that the defence lobby is keen to brand investments in its companies as social impact investments and already in 2022 urged the EU to recognise the defense industry as a positive contributor to social sustainability under the ESG taxonomy.

While the exclusion of weapons has long been one of the widely accepted and practiced exclusion criteria within the investment industry, the danger looms of a norm shift towards a broad acceptance and willingness of investing in the defence industry, both in times of war and in times of peace. The structural shift towards a permanent war economy that may result from this norm shift will prevent us from achieving our larger social and environmental ambitions.

It is therefore more than ever important for responsible investors to focus on their core principles, values and long-term ambitions. This is why we remain committed to its exclusionary criteria on the defence industry and continue investing in a sustainable society and economy.