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The defense sector in the reconquest of finance

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A world made up of discreet negotiations, possibly tainted by kickbacks, and in the service of war… The contracts of defense companies, renowned for their lack of transparency, have, for years, aroused the mistrust of the world of finance. After four months of armed conflict in Ukraine, the arms manufacturers, meeting from Monday June 13 in Villepinte on the occasion of the Eurosatory exhibition, hope to be better perceived by investors.

The importance of impact finance

Brought back to the fore because of the war, the financing by private actors of the defense industries is a “old sea serpent”, smiles Mourad Chabbi, professor at Grenoble School of Management. Historically marked by the support provided by States, the armaments sector has seen their influence diminish as the belief in a world of lasting peace grew with the end of the Cold War.

At the turn of the 2010s, the theme of impact finance gained the consciousness of investors, particularly in countries with a pacifist tradition 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 in order to direct their clients’ savings towards the financing of sustainable activities.

In France, the Sapin 2 law, enacted at the end of 2016, also strengthens the mechanisms for preventing corruption at banking level. “Because arms has sometimes been a sector marred by ethical issues, investors have concluded that it is, in its entirety, controversialexplains Bertrand Delcaire, director of investor relations at Thales. Therefore, they excluded from their ESG funds all companies whose turnover included defense activities without distinction. » According to the leader, the holdings of company shares by European funds outside France and the United Kingdom have been halved in five years. Most of the German management companies left its shareholding.

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Affected valuation

Large, listed companies have seen their valuation affected in recent years. “The systematic exclusion of defense companies obviously poses a problemcontinues Bertrand Delcaire. Unfortunately, it is easier to set up than engaging in dialogue with each company to understand its portfolio and where the issues lie. ESG fund managers seem to be unaware that 50% of our activity is in the civilian sector, for example in support of cybersecurity or the decarbonization of aviation, which they claim are essential. »

Less visible because they are absent from the Stock Exchange, the hundreds of VSEs and SMEs that constitute the industrial and technological base of the sector are no less exposed to the reluctance of investors. “Stuck in their access to finance, they risk being bought out, or suffering a slow death”, explains Mourad Chabbi. For their part, subject to societal pressure, “Banks guard their reputation and fear being caught for financing a corrupt activity,” explains Julien Malizard, deputy holder of the defense economics chair at the Institute for Advanced National Defense Studies.

The war in Ukraine has changed the situation, with some encouraging signals for manufacturers. Since April 1, the Swedish bank SEB has authorized six of its funds to invest in arms companies. In Germany, public regional banks are returning to the tank manufacturer Rheinmetall, after having shunned it. “The wall seems to be crackingsummarizes Mourad Chabbi. There is an awareness that ESG criteria no longer correspond to the need for defense in Europe. » French industrialists remain, on the whole, cautious: if, on the ground, many are still being refused loans, some are more optimistic about the possibility of a conversion from their banking partners.

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Ambivalences of the Commission

This wait-and-see attitude is fueled by the ambivalence of the European Commission, which presented, in March 2021, a European eco-label for financial products intended for individuals from which the assets of a company generating more than 5% of its turnover would have been excluded. business in defence. Three months later, the Commission credited the new European Defense Fund, running until 2027, with 7 billion euros…

It continues to develop its social taxonomy project, which, in a preparatory version, classified armaments as a harmful sector in the same way as tobacco or gambling. As early as February, the experts had however distinguished the armament of these disturbing neighbors, in a text which should lead, according to financial circles, in 2024.

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