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Western rating agencies, banks and pension funds are being “stupid” in shunning defence investments, one of Nato’s most senior officials has warned, as he called on financial institutions to adapt to rising security threats.
Admiral Rob Bauer, chair of the alliance’s military committee, told the Financial Times that a failure by investors to understand their role in “collective defence” meant they risked missing out on significant government funding in the wake of Russia’s full-scale invasion of Ukraine in 2022.
“Why are you not convinced by trillions of dollars? What has happened to your business instinct? Are you stupid? And that’s what I say to pension funds as well. Are you stupid?” said Bauer. “If you are looking at return on investment . . . there’s so much money to be spent over the next 20 years.”
Bauer’s plea comes as European governments scramble to ramp up their military procurement and production to keep arming Ukraine, and just weeks before the inauguration of president-elect Donald Trump, who has demanded that Europe rely less on the US for its security.
“This is about the rebalancing of power between China and the US. If tectonic plates shift, you have earthquakes. If the plates of geopolitical power shift, you have wars,” he said. “I don’t think there will be world wars per se, but regional wars, as we see now, are probably part of our near future.”
Shares in many large European defence companies including Germany’s Rheinmetall and Norway’s Kongsberg Gruppen have surged in the last year as government orders for tanks, missiles and artillery have swelled and investors bet that Nato rearmament will boost earnings for years to come.
But some European banks are still reluctant to lend to arms makers to help them to scale up production. The issue is particularly acute for smaller producers crucial to the wider supply chain.
While venture capital investments in defence start-ups in Nato countries has risen fourfold since 2019, several institutional funds in Europe are still barred from investing in armaments based on environmental, social and governance (ESG) concerns. The EU common budget also has a prohibition relating to direct investments in defence.
Bauer, a Dutch naval officer who steps down from his Nato role later this month after serving his three-year term, said those policies were obsolete.
“There are still pension funds and banks that say it’s not ethical to invest in defence capabilities because they kill people,” he said.
“And then there is the issue of sustainability goals, and to them I say: go and visit Gaza. Go and visit Ukraine. Go and visit Yemen. Go and visit Syria and have a look. You will see what war does,” he added. “Investing in defence for deterrence purposes is actually the best sustainability measure.”
The European Commission and more than a dozen EU governments have been increasing pressure in recent weeks on the European Investment Bank, the bloc’s lending arm, to end its near-total ban on weapons funding to help strengthen Europe’s defence industry.
Bauer also pointed out that some eastern Nato members “are being given a lower [sovereign] rating because they’re closer to Russia, closer to the threat. One would assume that if you’re part of Nato, you will get a bonus, instead of being punished”.
When S&P Global Ratings downgraded Estonia, Lithuania and Latvia in May last year, it cited the economic impact of the war in Ukraine on the three Baltic states.
Rating agencies factored in the benefits of Nato membership but also had to look at fiscal impacts such as higher defence spending in what were ultimately assessments of countries’ ability to repay debt, people familiar with their methodologies said.
Nato has launched its own fund to invest in defence start-ups, while the EIB, which is governed by all EU member states, is under pressure from some capitals to expand its lending to defence projects.
“The lack of strategic thinking is sometimes astonishing . . . It’s not enough for businesses to just look at their next quarter,” said Bauer. “For a large number of business people, [the security threat] is still a sort of far away thing. But it’s not.”
Bauer said he was shocked after attending a financial gathering hosted by an American financier in Los Angeles last year, where he was the only one wearing a military uniform and defence was on nobody’s radar.
“This whole idea that money is disconnected from security is a concern, because economies thrive only in a stable and secure country. And that stability and that security has been guaranteed for 75 years by Nato.”
Bauer added: “Defence is not a cost. It’s an investment. And that’s what has to change in the heads of many, many people. It doesn’t seem to be an automatic connection in the heads of investors, rating agencies, etc [that process] is irritatingly slow.”
