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EU defence ministers to demand better finance access for industry

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EU defence ministers are expected to issue a joint statement on Tuesday (14 November) calling on banks to grant the defence industry access to loans, in a bid to remove hurdles for greater investment into production capacities.

The statement will call for “strengthening the European defence technological and industrial base’s (EDTIB) access to finance and its ability to contribute to peace, stability, and sustainability in Europe”, according to a draft text seen by Euractiv, to be adopted at the European Defence Agency (EDA) steering board meeting.

Defence ministers are to “call on public and private finance institutions with a view to related investors and other market participants to avoid discriminating against investments in the EDTIB and to adjust their policies accordingly”, among other measures. 

Russia’s war on Ukraine and the urgent need for large amounts of defence equipment for both Kyiv and the Europeans’ depleted stocks have put the issue of investment into new production capacity for ramp-up at the forefront of the debate.

The European defence industry has been criticising the bloc’s taxonomy system – the way it classifies activities as ‘sustainable’ or ‘non-sustainable’ — arguing the industry should be explicitly included in the former category to safeguard funding routes — and asked for more leniency in them respecting strict Environmental, Social, and Governance (ESG) criteria.

They have been stating they are discriminated against when it comes to accessing private and public funds, as banks’ willingness to lend decreased, which hinders their investment opportunities.

The EU defence ministers’ statement is a first step in the direction of common unanimous support from the leaders and EU top officials, as will “highlight that the EDTIB plays in contributing to Europe’s overall safety and security”, to which the defence industry contributes, one EU official said.

But a higher level of official commitment remains needed, one industry representative who preferred to remain anonymous said. So far, only lone Commissioners have expressed their concerns on the matter, such as Thierry Breton, in charge of defence and the internal market.

Rehaul of EIB rules

While EU leaders agreed last year agreed to take measures “to promote and facilitate access to private funding for the defence industry, also by making the best use of the possibilities offered by the European Investment Bank (EIB)”, not much has changed since, industry representatives criticise.

The bloc’s defence ministers will reiterate the call for the EIB to “enhance its support for EU defence and security objectives overall”.

However, the EIB has so far remained reluctant to play any bigger role in lending money to the defence industry or member states for military purposes and the decision to shift the bank’s character rests in the hands of the finance ministers, rather than the defence ministers or its future president.

EU finance ministers have been looking into granting defence spending a special status in the EU fiscal rules under the new economic governance review (EGR) in a bid to encourage member state investment in this area, according to Euractiv’s information.

ESG criteria application

With a rather general approach, EU defence ministers will “call for enhanced coordination between national and EU institutions on ESG matters”, the text states.

The goal is “to mitigate negative effects on the EDTIB and find alternative ways to enable further investments in defence, by making investments in defence more attractive to investors”, it says, in reference for instance to new policies to enable more investment.

“Many ESG indexes exclude companies with activities in the defence and armaments sector,” which “has wide-ranging negative consequences”, such as limiting the number of investors and damaging its reputation, including on the labour market especially for small and medium enterprises and start-ups, the text continues.

The ESG criteria had indeed been causing issues, the EU official confirmed.

“The access to finance for the EDTIB to public and private financing has become increasingly a challenge for the new defence sector especially for SMEs and mi-caps due to the rapid growth of the ESG criteria, which sometimes are very defence companies from accessing loans from banks,” they said.

Ministers also plan to mandate the EDA to propose “appropriate measures” to mitigate the impacts of EU sustainability criteria on the EU.

Special role, special treatment

Instead, the defence sector should benefit from a special treatment, ministers will suggest.

Its “unique societal role, way of operating, and missions [shall be] duly taken into account when sustainable finance policies, regulations, reporting requirements, and standards are developed and applied to the EDTIB”.

They add that “while the efforts related to enhancing the sustainability of the EDTIB may also contribute to Europe’s resilience, these efforts cannot come at the expense of the operational effectiveness of the Member States’ Armed Forces”.

The same EU diplomat also said that “in order to support the EDTIB and strengthen European defence, sufficient access to both public and private financing for the defence industry is important”.

Russia’s war against Ukraine “has demonstrated that reactive and resilient production capacities and supply lines are key to replenishing Member States’ armaments stockpiles and supporting EU’s partners engaged in high-intensity operations in self-defence,” EU defence ministers write to the financial institutions.

[Edited by Alexandra Brzozowski/Nathalie Weatherald]

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