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It’s a tragedy that massively increasing funding to Europe’s military-industrial complex has risen to very near the top of the urgent policy and action agenda. That, alas, is the depraved and degenerate world we inhabit. Not much more to say than that.
To get the requisite funding Europe needs to arm itself to the teeth and create appropriate levels of fear and deterrence, private sector debt financing will play a key role alongside public funding to channel capital efficiently and at optimal marginal cost to where it is most needed. In the form of bank lending, private debt, private placements, public capital market financing and everything in between. And that activity will generate some growth momentum for the moribund regional economy. ( Growth is growth, right? Who cares what drives it and how? )
In coming years, we can expect a tidal wave of financing activity that will pay a LOT of fees. In a world of finite amounts of private capital, funding defence and the military will divert a lot of capital away from environmental, social and governance ( ESG ) themes. And by ESG I mean ‘old ESG’: projects that fund social and environmental betterment. [Preventing your country from being bombed to destruction might be seen as a form of sustainability, even if it means having to bomb someone else’s country to destruction to achieve it. But that isn’t what the sustainability label is really intended to capture.]
The bond market will be presented with an army of opportunities [pun intended] to fund companies in the military and defence supply sector and its lengthy supply chain; as well as individual governments; the EU ( via standard and/or bespoke funding programmes ); the Defence, Security and Resilience Bank ( the multilateral lending institution in the process of being set up ); and banks ( to boost on-lending volumes ).
Debut labelled defence bond
Enter right on cue a European Defence Bond from French lender BPCE, the debut labelled defence bond whose methodology is aligned with Euronext’s shiny new European Defence Bond Label. The bond’s details barely matter but for the record, it was a €750 million ( US$876.35 million ) five-year preferred senior unsecured bond that priced with a 3.125% coupon. That’s equivalent to a spread of 85 basis points ( bp ) over mid-swaps, having tightened from initial thoughts of 105bp to 110bp.
Investors were reasonably happy to accept an early Christmas present in the form of a chunky new-issue giveaway. I say “reasonably happy” because I’d argue the final book of €2.85 billion was uninspiring. Some of that was down to French political instability in the past week, but a lot was also down to ambivalence about the label.
What I find distasteful and tiresome about the whole thing – well, there are a few things. The first is the wholesale finance industry’s decades-long obsession with labelling everything to reduce whatever they do to a cheap marketing exercise.
Second and closely related: what exactly does the label do for BPCE’s on-lending? The bank has already crowed that in the last three years it has increased its financing commitment to the defence industry by 2.5 times and increased export finance for French defence products by over seven times ( that is, it has massively helped boost the export of French armaments ). In that context, the benefit of the bond label is equivalent to the square root of zero.
The third is BPCE’s efforts to dress up its defence bond as a labelled ESG bond, using the four-step green, social and sustainable ( GSS ) labelled bond blueprint: use of proceeds, process for project evaluation and selection, management of proceeds, and reporting). That’s more cynical. Only on page 26 of its 39-page investor presentation does BPCE acknowledge that it doesn’t seek to qualify its European defence bonds as sustainable under the Principles ( which provide the framework for the family of GSS instruments ) or claim alignment with them. That’s because it didn’t have a choice.
The Principles are managed by an executive committee of leading investors, issuers and underwriters, and administered by the International Capital Market Association ( ICMA ). At the time of its AGM on June 26, the executive committee confirmed the “likely ineligibility of defence projects for GSS Bonds”. While ICMA and the executive committee may well at some point involve themselves in defence and security funding and how it relates to the ESG theme, BPCE’s route was already closed on this occasion.
Military, ESG don’t belong in same sentence
Funding the military is a depressing case of “it is what it is”. But let’s not buy any nonsense that weapons manufacturing, stockpiling, export, provision of military infrastructure and services, and the array of related fields are a new dimension of ESG. They aren’t. Institutions that change their investing, arranging or underwriting criteria to make these or related things ESG-eligible according to internal statutes or governance criteria are doing nothing but engaging in cynical manipulation and out-and-out greenwashing.
I don’t mean unduly or unfairly to target BPCE here, but it’s ploughed ahead and launched the first labelled defence bond so it’s laid itself open to first-mover scrutiny. Other banks will face identical issues. But I do find BPCE’s argumentation around defence puzzling in the context of its stated ESG orientation.
For a start, the bank’s defence and security policy aligns with the seven priority funding areas laid out in the European Commission’s White Paper for European Defence Readiness 2030. That means air and missile defence; drones and anti-drone systems; artillery systems; strategic enablers and critical infrastructure protection; ammunition and missiles; AI, quantum, cyber and electronic warfare; and military mobility are all eligible for on-lending under its defence bond methodology. ESG?
The bank’s defence policy excludes funding for equipment prohibited by international conventions ( cluster munitions; anti-personnel mines; non-detectable fragments weapons and blinding laser weapons; biological or toxin weapons; chemical weapons; nuclear weapons; equipment having no practical use other than to inflict the death penalty, torture, or other cruel, inhuman, or degrading treatment or punishment ).
But even here it can grant exceptions “in exceptional circumstances”. This entire narrative is rooted in exceptional circumstances. Cases will present themselves. Compare two statements BPCE makes ( separately ) in its marketing:
Leaving aside what on earth a comprehensive approach to planetary boundaries even means, aren’t the two comments kind of incompatible? BPCE even has a defence and security ESG sector policy, which it has just updated and which “aims for responsible positioning that balances support for sovereignty issues with a rigorous management of ESG risks”.
Not sure this hangs together as a proposition.
