EU may relax ESG criteria for defense industry

The European Commission is considering adjusting sustainability rules to help defense companies secure private financing and raise cash from investors.

This could provide relief to arms manufacturers and other defense companies across Europe who have blamed environmental, social, and governance (ESG) investment criteria for deterring large private investments, as part of broader EU-backed efforts to boost arms production across Europe.

Commission spokesman Thomas Reigner told Euractiv on Monday that the Commission is evaluating the “adjustment of the sustainable finance framework” as part of efforts to increase financing for the sector.

Reigner stated that the EU executive body is laying the groundwork for a defense simplification package known as “Omnibus” to create “conditions for rapid industrial ramp-up across Europe.”

According to a document Euractiv saw, European Commission President Ursula von der Leyen planned to raise the issue of access to finance at an event with European defense companies on Monday, on the occasion of the launch of the EU’s strategic dialogue with the defense industry.

Relaxing ESG restrictions could pave the way for private investments in areas such as ammunition production. Both defense ministers and the defense industry have repeatedly called on the EU to improve access to credit from banks and financial institutions.

Specifically, they criticized the bloc’s current sustainable investment classification for not listing arms manufacturers and preventing banks from lending to these companies. They demanded that defense companies be reclassified as “harmless” under the criteria.

In its recently published white paper on defense policy, the Commission promised to remove “obstacles related to access to finance, including ESG investments,” for defense companies but provided few details at the time.

The European Investment Bank (EIB) had previously changed its investment practices to allow more cash flow to the arms industry. The EIB’s criteria for dual-use products, such as cybersecurity systems and drones, which have both civilian and military purposes, have been progressively relaxed over the past year.

In March, the EIB called for a “simplification exercise” to ease specific lending conditions for the European defense industry.

Following the EIB’s lead, Euronext, Europe’s largest stock exchange group, also announced that it will review its mission statement to ensure better access for defense companies to private investment opportunities.

ESG-focused investors are debating whether defense companies can truly be considered sustainable due to concerns that they may contribute to deadly conflicts and serve undemocratic regimes.