Pressure mounts on finance chiefs to tweak EIB, taxonomy rules in boost to defence

Pressure is piling up on the EU to loosen its investment rules and boost flows into defence assets, a non-paper seen by Euractiv revealed as finance ministers prepare to discuss the future of the bloc’s public lender on Friday (23 February).

According to the document, circulated ahead of this week’s ministerial meeting of economy and finance ministers, member states including the Czech Republic are ramping up calls to amend both the European Investment Bank (EIB)’s defence-related lending criteria and EU sustainability requirements (ESG) that would be restricting companies’ access to financing.

“When it comes to private investment, we have to focus on the appropriate incentives and eliminate artificial barriers” to investing in defence, the document seen by Euractiv reads, warning that banks and financial markets investors are steering clear of defence companies for reasons “usually related to the environmental, social and governance (ESG) reporting and the EU taxonomy”.

“In this regard, we should use the discussion about the future of the EIB and its lending policy” as an important benchmark not only for public funds but also for private market investors, the document states.

Currently, the EIB only funds dual military- and civil-application projects whose future revenue must come primarily from the civil-use component.

On Friday, finance ministers will hold a closed-door meeting on the path forward of the EU’s investment banking arm – whose board they represent. 

It is the first time the matter of giving the defence industry better access to finance will be on the finance ministers’ table, showing an increased interest in tackling the issues raised by defence ministries and the industry itself.

In what could be interpreted as a bold theoretical stretch, the paper also urges “the inclusion of the defence industry into the scope of sustainable finance”, in particular by adding defence assets to the bloc’s taxonomy legislation as ‘socially sustainable’ investments.

“Defence is a key contributor to the public good of security, which is at least as important as, and a precondition for, sustainability,” the European Aerospace, Security and Defence Industry Association (ASD) argues.

In November, defence ministers urged changes on both EIB and ESG-related rules to sway private investor money into defence assets, broadly replicating earlier calls from the sector in the same direction. EU leaders have also repeatedly asked for the EIB to be more involved in defence investment.

Calviño’s benevolent hints

On the EIB side, freshly-appointed chief Nadia Calviño signalled quite zealously a new emphasis on supporting defence investment earlier this month, steering away from its traditional strict dual-use-only investment policy. 

Calviño told the Belgian newspaper L’Écho that she was “looking forward to discussing [funding weapons and ammunition] with the finance ministers”.

“It is clear that our message is that we are very active, or as active as the projects allow, in the area of defence,” she said ahead of her inaugural meeting with the bloc’s financial ministers in Ghent.

“The EIB is an active supporter of defence, and we are ready to invest more in this area. There is no doubt about that.” 

This shift beyond dual-use, the Czech document said, would also “present for [financial institutions] a significant signal triggering investments to the defence sector”, since the public bank could leverage its stellar rating on markets to access lower interest rates and prompt a wider set of investors to move into these assets.

Redefinition of ‘sustainable’ investment: a bold theoretical stretch?

To the end of boosting positive signals to private investors, the paper calls on finance ministers as well as the Commission to go much further than tweaking the EIB lending remit.

“We should work on incentives for private investors, especially to underline that the support of a competitive European defence industry is socially responsible,” by making sure defence is not considered ‘unsustainable’ and is socially acceptable.

“One possible incentive could be an adjustment of the EU taxonomy for the social dimension (pillar S),” the paper suggests as a discussion point for the ministers.

After a consultation and a final report by the Platform on Sustainable Finance in early 2022, the social component of the taxonomy was said to have been put on the back burner by the Commission, with some indicating a deliberate decision to postpone the work by a few years.

Meanwhile, the Czech paper also calls on EU legislators to consider setting up “financial instruments that reduce the risks associated with investing and lending to this sector. These financial instruments could then be linked to the prospective EU taxonomy for the social dimension,” similar to how European Green Bonds are attached to the environmental criteria set out by the taxonomy.

One could easily see how controversial these moves could prove to the wider public.

Laëtitia Sédou, EU project officer for the European Network Against Arms Trade (ENAAT), noted that: “As far as taxonomy is concerned, what the sector is asking for is a reversal of the evidence: producing arms should be considered intrinsically socially beneficial.” 

This premise, she argues, “doesn’t hold water” and would “render the very concept of social taxonomy completely meaningless”.

[Edited by Nathalie Weatherald]

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