The defense sector in the recapture of finance

A world of careful negotiation, possibly tainted by kickbacks and at the service of war… Defense company contracts, notoriously opaque, have been a source of distrust in the financial world for years. After four months of armed conflict in Ukraine, arms manufacturers who have gathered in Villepinte on the occasion of the Eurosatory exhibition since Monday, June 13, hope that investors will take them better.

The Importance of Impact Finance

The return to the forefront of private financing of the defense industry due to the war is “old sea serpent”, – smiles Murad Chabbi, professor at the Grenoble School of Management. In the arms sector, historically marked by state support, their influence has waned as faith in lasting world peace has grown with the end of the Cold War.

At the turn of the 2010s, the topic of impact financing attracted the attention of investors, especially in countries with pacifist traditions, such as Germany or Belgium. Whether they manage mutual funds, pension funds, or sovereign wealth funds, they are increasingly integrating ESG (environmental, social, governance) criteria to channel their clients’ savings to fund sustainable activities.

In France, the Sapin 2 law, passed at the end of 2016, also strengthens corruption prevention mechanisms at the banking level. “Because the arms sector is sometimes clouded by ethical issues, investors have come to the conclusion that this is generally a moot point.explains Bertrand Delcaire, Director of Investor Relations at Thales. Therefore, they excluded from their ESG funds all companies whose turnover included, without exception, defense activities. » According to the leader, in five years, the share of the company’s shares held by European funds outside of France and the UK has halved. Most of the German management companies withdrew from his shareholding.

Affected assessment

Large listed companies have seen their valuation suffer in recent years. “The systematic exclusion of defense companies obviously poses a problem.continues Bertrand Delker. Unfortunately, this is easier to set up than it is to engage in dialogue with each company to understand their portfolio and where the problems lie. What ESG fund managers don’t seem to know is that 50% of our activities are in the civilian sector, like supporting cybersecurity or decarbonizing aviation, which they claim is necessary. »

Less visible because they are not listed on the stock exchange, the hundreds of VSEs and SMEs that make up the manufacturing and technology base of the sector are no less subject to investor reluctance. “Stuck in access to finance, they risk being bought out or subjected to a slow death,” explains Murad Chabbi. For its part, subjected to public pressure, “Banks protect their reputation and are afraid of being caught in the financing of corrupt activities”, explains Julien Malizard, deputy chair of defense economics at the Institute for Advanced Study of National Defense.

The war in Ukraine has changed the situation, sending some hopeful signals for manufacturers. Since April 1, the Swedish bank SEB has allowed six of its funds to invest in arms companies. In Germany, state-owned regional banks are returning to tank manufacturer Rheinmetall after they abandoned it. “The wall seems to be crackingsums up Murad Shabbi. There is a realization that the ESG criteria no longer meet the need for protection in Europe. » French industrialists remain generally cautious: while many continue to be denied credit locally, some are more optimistic about the possibility of a conversion from their banking partners.

The ambivalence of the Commission

This wait-and-see attitude is fueled by the ambivalence of the European Commission, which introduced in March 2021 a European eco-label for financial products intended for individuals from which a company’s assets generate more than 5% of its turnover. defense would have been ruled out. Three months later, the Commission credited the new European Defense Fund, up to 2027, with 7 billion euros…

He continues to develop his project of social taxonomy, which in its preparatory version classified weapons as a harmful sector in the same way as tobacco or gambling. Back in February, however, experts identified the weaponry of these troubling neighbors in a text that financial circles say should appear in 2024.

————————

Australia compensates Naval Group for breach of contract

The Naval Group will receive 555 million euros from Australia in compensation for breaching a giant 56 billion euros submarine contract that sparked a diplomatic crisis between Paris and Canberra last fall. In September 2021, then-Australian Prime Minister Scott Morrison unexpectedly terminated the French contract, preparing for ten years, opting to purchase American or British nuclear submarines. The Naval Group on Saturday welcomed “A fair deal”.

.