Opinion: Defence and Sustainable Finance: Europe's Strangely Split Personality
(Source: Thales CEO Patrice Caine; posted Sept. 29, 2022)
Ask anyone around you whether manufacturing arms is compatible with sustainable development – the chances are they'll say no.

But ask them if France and Europe need an effective military capability to safeguard peace and freedom on our continent, and I suspect the answer will be a resounding yes.

Would it be ludicrous to argue that peace and sustainable development are two sides of the same coin? Strange as it may seem, this a topic of furious debate in the corridors of power of Europe.

On the one hand, amid growing geopolitical tensions and the outbreak of war in Ukraine, Europe is pushing to expand its defensive capabilities and re-assert its sovereignty. On the other hand, failing to spontaneously include the European defence industry in the ambit of sustainable finance undermines the companies that serve our armed forces every day.

It would be a mistake to underestimate the impact of this exclusion: it is already having serious consequences for European defence contractors.

First, it is progressively restricting their access to capital markets, driving away European investors in favour of investors from other regions. For example, the proportion of publicly traded Thales shares held by investors in continental Europe (excluding France) fell by 20% between 2017 and 2021 and now stands at just 8% of the free float.

Second, these developments are depressing the market value of our defence companies compared with their peers in the United States, the United Kingdom and Asia, making them weaker and more vulnerable and ultimately stifling their prospects for growth.

Last but not least, this snub to the high-tech industries of the future is having a symbolic impact. It is making them less attractive to new talent and putting them at a serious disadvantage in today's fiercely competitive labour market.

With these three factors combined, and with war raging on their doorstep, the Europeans are eroding with one hand the defence capabilities and sovereignty they are trying to build with the other.

How did we get to this absurd situation? You could almost say it happened by accident.

European legislation does not explicitly banish defence from the table of sustainable finance. The environmental taxonomy, the European Commission's system for classifying the parts of the economy that may be marketed as sustainable investments, makes no mention of the defence sector.

That means that investors and financial institutions have to decide for themselves whether or not to include defence contractors in their "green" or "responsible" investment portfolios.

Without clear guidance, they are obliged to base their decisions on weak signals coming out of Brussels – and for several years the talk has been that sooner or later, the EU will end up ruling that the defence industry is incompatible with sustainable finance. Until recently, in fact, the working group in charge of the second dimension of the taxonomy (the "social taxonomy") was recommending that the defence industry be excluded completely. The Ecolabel project for retail financial services has been taking a similar stance, with plans to exclude companies that generate more than 5% of their revenues from military sales. The "logical" conclusion for many financial institutions has been that the simplest (some would say simplistic) and least risky option is to bar defence stocks from sustainable investment funds.

This is how Europe – without explicit intention and above all without any open debate or formal decision – is gradually putting the companies that equip its armed forces at a competitive disadvantage. It is even more paradoxical to see the defence industry being dragged through the mud in the name of environmental and moral leadership when our armed forces are going to be on the front lines dealing with the impact of climate change. We know full well that climate factors will exacerbate global conflict, give organised criminals added leverage and lead to natural disasters of ever greater intensity – to which only the armed forces will have the resources to respond.

And yet by setting up a 7 billion euro defence fund and adopting a common Strategic Compass on security matters, the European Union seems to have recognised the crucial importance of having a strong defence capability and a world-class industrial and technological base.

In the current context, there is an urgent need for consequential action and unambiguous acceptance that European defence contractors have a key role to play in building a sustainable future.

Patrice Caine is chief executive officer of the Thalès Group.


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