Creating the financial conditions for defence, security investments in europe

A primary obstacle to increasing defence spending is the sector’s exclusion from financial institutions’ mandates. Banks, pension funds, and sovereign wealth funds frequently deny services to defence companies due to ESG concerns, categorising the industry alongside ‘sin stocks’ like tobacco. This creates a negative perception that undermines its societal role and restricts access to banking, capital, and insurance, stifling innovation.

The conflict in Ukraine highlighted the critical role of startups in delivering rapid battlefield solutions, yet these ventures often face rejection from financial services solely because they serve defence markets. The report recommends financial institutions revisit exclusion lists to support European security. Notable progress includes a March 2024 letter from 14 European Prime Ministers encouraging the European Investment Bank Group (EIB) to reconsider its stance. Consequently, the EIB waived the requirement that dual-use companies must derive over 50 per cent of revenues from civilian applications. The report argues that ESG and defence should be viewed as complementary, as defence underpins the peace and stability necessary for sustainable development.

Removing barriers to adopting emerging technologies for defence and security

Building a resilient European defence capability requires reforming the industrial base and procurement processes. Traditional ‘exquisite platforms’ like manned fighter jets are increasingly vulnerable to cheaper, numerous uncrewed systems. Current production rates cannot match the pace of potential battlefield losses or innovation. Future planning must prioritise large volumes of autonomous capabilities, necessitating a redesign of force structures and a supply chain strategy prioritising European manufacturing and critical minerals.

Current development programmes, often spanning decades, are ill-suited for the rapid iteration seen in Ukraine. The report suggests governments allocate specific budgets for rapid adoption cycles of one to two years, rather than the traditional ten-year timeline. It also advises leveraging the commercial technology sector for weekly upgrade cycles and fostering direct interaction between front-line military users and suppliers to patch vulnerabilities within hours.

Setting the foundation for responsible investment, development and deployment of emerging technologies

Integrating AI and autonomous capabilities in military decision-making enhances capabilities but introduces risks regarding trust, safety, and accountability. Investors and innovators often struggle to evaluate whether technologies are designed responsibly. The NATO Innovation Fund (NIF) has developed a ‘Responsible Use Framework’ aligned with NATO’s Principles of Responsible Use (PRUs) for AI, autonomy, and biotechnology.

This framework goes beyond standard ESG checklists, requiring deep risk assessments, including the evaluation of test, validation, and verification (TEV&V) processes. It assesses whether technologies align with PRUs, if companies possess adequate governance, and if appropriate safeguards are in place, aiming to balance rapid innovation with ethical standards.

Conclusion

Europe’s security depends on creating a favourable financing environment by revisiting exclusion lists, reforming outdated procurement systems, and prioritising ethical dual-use technology. A secure Europe requires unity and a vision that integrates defence with responsible innovation.