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Western rating agencies, banks and pension funds are “stupid” in avoiding defense investment, one of Nato's top officials has warned, as he called on financial institutions to adapt to growing security threats.
Admiral Rob Bauer, chairman of the federal military committee, told the Financial Times that the failure of investors to understand their role in the “collective defense” means that they are at risk of missing out on important government funding after the full-scale invasion of Ukraine by Russia. 2022.
“Why can't you be guaranteed trillions of dollars?” What happened to your business instincts? Are you stupid? That's what I say about the pension fund. Are you stupid?” said Bauer. “If you're looking for a return on investment . . . there's a lot of money to be spent over the next 20 years.”
Bauer's plea comes as European governments are scrambling to ramp up their military output and production to stay armed in Ukraine, and just weeks before the inauguration of president-elect Donald Trump, who has called for Europe to rely less on the US for its security.
“This is about the realignment of power between China and the US. If the tectonic plates shift, you have earthquakes. If the political power plates shift, you have wars,” he said. I don't think there will be world wars, but local wars, as we see now, are part of our near future.
Shares in several European defense companies including Germany Rheinmetall and Norway Kongsberg Group have surged in the past year as government orders for tanks, missiles and artillery have increased and investors bet that Nato rearmament will boost earnings for years to come.
But some European banks are still reluctant to lend to equipment makers to help them ramp up production. This issue is particularly difficult for small producers who are important in the wider supply chain.
While capital investment in defense initiatives in NATO countries quadrupled since 2019many institutional funds in Europe are still prohibited from investing in instruments based on environmental, social and governance (ESG) concerns. The common EU budget has restriction related to direct investment in defence.
Bauer, a Dutch naval officer who is stepping down from his NATO role at the end of this month after a three-year stint, said those policies were outdated.
“There are still pension funds and banks that say it is not fair to invest in defense skills because they kill people,” he said.
“And then there is the issue of stability goals, and to them I say: go and visit Gaza. Go visit Ukraine. Go and visit Yemen. Go visit Syria and see. You will see what war does,” he added. “Investing in security for preventative purposes is the best way to be sustainable.”
The European Commission and more than a dozen EU governments have stepped up pressure In recent weeks the European Investment Bank, the bloc's lending arm, has lifted its ban on arms financing to help boost Europe's defense industry.
Bauer also pointed out that some eastern NATO members “are given a lower (superior) rating because they are closer to Russia, closer to the threat.” One would think that if you are part of NATO, you will get a bonus, instead of a penalty”.
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 have shown the benefits of Nato membership but had to look at financial impacts such as higher defense spending in what was ultimately a test of countries' ability to pay debts, people familiar with the methods said.
NATO has started its fund to invest in defense start-ups, while the EIB, controlled by all EU member states, is under pressure from other capitals to increase its lending for defense projects.
“The lack of creative thinking is sometimes shocking . . . “It's not enough for businesses to look to their next quarter,” Bauer said. “For the vast majority of businesses, (the security threat) is still a distant reality. But that's not the case.”
Bauer said he was shocked after attending a financial conference hosted by an American financier in Los Angeles last year, where he was the only one in military uniform and defense was on everyone's radar.
“This whole idea that money is cut off from security is a concern, because the economy only thrives in a stable and secure country. And that stability and security has been guaranteed for 75 years by NATO. ”
Bauer added: “Protection is not expensive. It's an investment. And that's what needs to change in the minds of many, many people. It doesn't seem to be automatic communication in the heads of investors, rating agencies, etc. (that process is annoyingly slow). “