Banks change course on weapons finance as defence spending rises

SEB AB, one of Sweden’s biggest banks, said this week it’s reversing a ban on investing in weapons as it adjusts its sustainability policy to match Europe’s new geopolitical reality.

AFTER years spent treating weapons manufacturers with caution, bankers in Europe are now positioning themselves for closer relations with the defense industry.

Russia’s war on Ukraine has led Germany – Europe’s biggest economy – to abandon its decades-old aversion to military spending, and instead embrace what Chancellor Olaf Scholz has called a “new era” of investment.

For banks and asset managers, the development means a group of clients that until recently had been kept at arm’s length is now being invited to seek financing.

SEB AB, one of Sweden’s biggest banks, said this week it’s reversing a ban on investing in weapons as it adjusts its sustainability policy to match Europe’s new geopolitical reality.

And Commerzbank AG signaled it’s keen to channel capital into arms manufacturers.

“It is clear that there will now be more investments in the defence industry here in Germany, and they’re all our clients,” Manfred Knof, the chief executive of Commerzbank, told analysts and investors this week.

“This is definitely a good basis. We know them, they know us and I’m sure they will talk to us for further investments.”

Just two months ago, weapons manufacturers were still struggling to get financing due to their near-pariah status in a world increasingly dominated by environmental, social and governance (ESG) considerations.

Rheinmetall AG CEO Armin Papperger told local media in January that his firm had been cut off from credit by German lenders LBBW and BayernLB, due to their ESG concerns. ADS, an umbrella organisation for defence lobbies across 17 European countries, is aware of similar examples across the European Union (EU), according to its secretary general Jan Pie.

But the European response to the war in Ukraine has changed everything. After Scholz’s Feb 27 pledge to ramp up spending, German defense stocks saw steep gains.

At the same time, weapons lobbyists are actively trying to shape a future stage of Europe’s ESG rules, a so-called social taxonomy. And there are signs the EU is listening.

In a policy paper last month, the bloc spoke of the need to ensure that “initiatives on sustainable finance remain consistent with EU efforts to facilitate the European defence industry’s sufficient access to finance and investment.”

The development has alarmed and bewildered many in the ESG industry. According to Util, a company that crunches big data to measure the environmental and social impact of businesses and investment decisions, the debate is misguided.

“Categorising weapons manufacturers as ESG-positive is a misrepresentation of the facts,” said Patrick Wood Uribe, CEO at Util. “Their purpose is warfare, which – setting aside a wealth of important moral questions – has no clear positive social outcomes.”

An analysis by Util of 120 million peer-reviewed texts showed that the defence industry “is responsible for many of the inventions that improve our living standards, as well as entire industries and millions of jobs in biotechnology and pharmaceuticals, electronics and telecommunications,” he said. But, “on the other hand, the industry has been and continues to be responsible for millions of deaths.”SEB said its change in policy, based on a view that “investments in the defence industry are of key importance to uphold and defend democracy, freedom, stability and human rights,” only affects certain funds.

It also noted that some investors have made clear they won’t touch such assets, and underlined its intention to avoid all weapons that violate international conventions.

Whatever happens with Europe’s social taxonomy, Knof of Commerzbank says Germany is witnessing a “fundamental change” in policy. — Bloomberg