Brothers in arms

Should pension funds invest more in defence? If so, the government must make the first move. But pension funds themselves need to consider what they are willing and able to contribute. This debate should not be allowed to get bogged down in the details - it is far too urgent a task for this. Now is the time to explore what pension funds and other investors can do to be part of the solution.

Enthusiastic about defence, critical of controversial weapons

First and foremost, we need to clear up a common misunderstanding here: most pension funds do invest in the mainstream defence industry. They have been doing so for many years, in line with their investment policy and with a view to realising a good ROI. These pension funds are convinced that weapons are needed to maintain law and order, and for peace, security and stability. While it is difficult to disagree with this, even these investments used to be subject to criticism.

However, pension funds have been drawing the line at controversial weapons for many years. This is encouraged by the government, which imposed an investment ban on cluster weapons in 2013. Pension funds also often blacklist manufacturers of land mines, and chemical, biological and nuclear weapons. Not because of the investment ban, but because investment is prohibited under international treaties and conventions. Controversial weapons are weapons that hit their targets randomly, whether they are civilian or military, and both during and after conflicts. As such, they violate fundamental human rights.

Stop with controversial weapons to pave the way for investments

Public calls for pension funds to invest more money in defence companies are increasing. That is an understandable request at a time of increasing geopolitical tensions and a large-scale war on the European continent. After all, protecting peace and security is a human rights issue as well. So how can we break the stalemate in this debate?

First of all, defence companies can make things easier for themselves. Because many companies in the defence sector are also involved in the production of controversial weapons or essential parts of such weapons. And just as it is impossible to have a little bit of integrity, a pension fund cannot invest a little ethically in companies that derive part of their turnover from controversial weapons. The solution would be to stop the production of these weapons and so remove the obstacle for more investments.

Government should give long-term purchase guarantees

Moreover, defence is not a regular economic market. As the sole customer of the defence sector, governments primarily determine its production capacity. That production capacity can be increased by providing long-term purchase guarantees, so that investments by and in defence companies pay off.

Governments must also take on a greater role in financing defence companies. For instance by issuing defence bonds. The government can then invest the capital raised by this in personnel and equipment. If compliance with the applicable legislation, treaties and conventions regarding controversial weapons is also guaranteed upon bond issue, this lowers the threshold for pension funds to step in and contribute.

Defence bond investment fund makes investing more attractive

Another option to raise capital for defence is to set up an investment fund. This can be done following the example of the NATO Innovation Fund, which finances solutions for social and defence issues. This can help innovative start-ups. A fund can achieve a scale that will enable pension funds to finance small and medium-sized businesses in the defence sector. Here, too, the government can take the lead, using available knowledge and the existing financial infrastructure.

Pension capital can be invested in defence through bonds or an investment fund. That is a more effective and targeted route than haphazardly buying shares in defence company at the stock exchange. This does not give defence companies - especially smaller ones - any additional room for investment. To achieve this, it is up to the government to make the first move. And as long as the ethical frameworks are in place with regard to investing in controversial weapons, investments in defence by pension funds are a viable option.