Weapons Group Points to Ukraine in Bid to Shape ESG Rulebook

(Bloomberg) -- With a Russian invasion right on its doorstep, Europe now finds itself discussing whether weapons should be listed as ESG assets, to grant them more favorable access to financing.

The bloc is about to embark on the next stage of a taxonomy intended to define environmental, social and governance investing rules. The Platform on Sustainable Finance -- a group convened by the European Union -- published its blueprint for the kinds of activities that might be deemed socially sustainable on Monday.

The list includes guidelines on pay, gender equality and humane supply chains. The Platform's proposed blacklist includes cigarettes and goods produced as a result of forced labor. On the question of weapons, it says the EU should draw on existing international protocols and conventions.

Whatever the outcome, the Platform says the EU should become a global “standard setter.”

But with years to go before a social taxonomy is ready, lobbyists are using what they see as a window of opportunity to try to shape the outcome. According to BDSV, a German defense industry lobby group, Russia's invasion of Ukraine last week is highly relevant to the question of social sustainability in Europe.

“The invasion of Ukraine shows how important it is to have strong national defense,” said Hans Christoph Atzpodien, who runs BDSV. “I appeal to the EU to recognize the defense industry as a positive contribution to ‘social sustainability' under the ESG taxonomy.”

Meanwhile, the defense industry says it has struggled to get loans as ESG concerns steer funding in the finance sector. Rheinmetall AG Chief Executive Officer Armin Papperger told local media in January that his firm had been cut off from credit by German lenders LBBW and BayernLB, due to their ESG concerns.

The EU has previously signaled a willingness to listen to some of the defense industry's arguments. In a policy paper earlier this month, the bloc underlined the importance of ensuring that “initiatives on sustainable finance remain consistent with the European Union efforts to facilitate the European defense industry's sufficient access to finance and investment.”

And over the weekend, Germany's Chancellor Olaf Scholz announced a massive boost in defense spending. “With the invasion of Ukraine, we are in a new era,” Scholz told lawmakers on Sunday, as he unveiled plans for 100 billion euros ($113 billion) in expenditure this year that will go toward modernizing Germany's military.

Social Investing

German Defense stocks soared on Monday, with Hensoldt AG up almost 90% after trading started and Rheinmetall AG jumping almost 50% once the market opened.

Even without a social taxonomy anywhere near completion, social investing is already attracting billions of dollars. The bloc has itself sold 100 billion euros of debt tied to a pandemic jobs program, receiving record investor demand in the process.

“It's clear to see if there were no social taxonomy, markets would create one,” said Nathan Fabian, chair of the Platform on Sustainable Finance.

Efforts to produce a social taxonomy come after the EU fielded harsh criticism for including gas and nuclear in its green taxonomy, a move the bloc argues will help smooth the transition to cleaner energy. But climate activists, investors and a number of EU member states have slammed the decision, which they say undermines Europe's green vision. The Platform was among those to condemn the move.

The task of coming up with a list of socially sustainable activities may prove even more daunting. The European Commission is unlikely to have a proposal ready this year, and the Platform's recommendations can't be considered comprehensive.

Talks on the social taxonomy have already been delayed by the controversy that engulfed the bloc's green rulebook, according to a person familiar with the matter who asked not to be identified discussing private deliberations. The Platform had initially been due to publish its recommendations last year, the person said.

The EU's financial services commissioner, Mairead McGuinness, earlier this month tried to manage expectations by underlining the “enormity” of the challenge the bloc faces in working through all the stages of its ESG legislation.