ESG – or environmental, social and governance – is a fine modern principle for a robust Western democracy such as Australia. Itisa lens through which companies and investors can consider sustainability and ethical performance when making decisions.
But here’s the rub: our precious democracy relies on defending our shores against totalitarian regimes. Yet “defence” has become a dirty word among most ESG-focused super funds in Australia.
Many have grown allergic to support innovation in our defence sector despite our profound need for greater sovereign capability.
As the chief executive of Australian defence contractor Drone-Shield, Oleg Vornik, told the Defending Australia conference in June: “The problem is that de-fence is considered under the same vein as coal, tobacco and pornography.”
If Australia is to stand a chance against the massive geopolitical threats we now face, that must change. We need our super funds to see it as a badge of honour to invest in the local innovation that will underpin our long-term national defence.
Moral confusion about what ESG really means has cleared in many of Europe’s democracies since the Russian invasion
Ukraine brought reality home. In May this year Europe’s largest stock exchange operator Euronext revised its definition of ESG to mean energy, security and geostrategy.
Likewise, US’s China rivalry has driven a partial turnaround in the ESG orthodoxy in the US. It is seeing renewed investment in military technology, $US3.2bn ($4.86bn) total of US aerospace and defence investment into start-ups in Ql alone, according to PitchBook. That is despite venture funding declining overall. As the Economist noted this year, “defence tech is blowing up Silicon Valley’s beliefs”, with companies such as Palantir, Anduril, Castelion and SpaceX all soaring in market value.
Australian Treasurer Jim Chalmers has called upon super funds to play a bigger role in de-fence and national security, with the federal government pushing for more institutional investment alongside public expenditure.
Putting aside Australia’s spasmodic, sclerotic defence procurement processes (which need drastic improvement, not least to give investors greater confidence – one for another article), I wholly support that principle.
One of Australia’s greatest achievements is our $4.2 trillion superannuation industry. Yet those funds remain a largely untapped source of capital for defence innovation.
The money is there, and the stock market success of companies such as DroneShield, despite many big funds missing out, show there is big money to be made. But ethical confusion about what ESG really is continues to hamstring investment.
Unlike Europe, we have not been shocked into action by an invasion of our landmass by an aggressive totalitarian regime. However, we have had more than enough warnings to shatter any shibboleths about Australian splendid isolation.
The US’s AUKUS review and China’s recent war gaming off our shores is all the evidence we need to know that Australia needs to develop its own thriving defence technology industry, and fast.
Australia has all the ingredients necessary to become a world leader in defence tech. But first, we must make it easier to invest in and operate businesses in the sector. Many defence companies struggle to access basic services such as business credit cards, insurance and other financial products. This isn’t unique to Australia:
Castelion, for example, couldn’t open a bank account in Silicon Valley until recently due to the stigma over weapon manufacture.
This must change. We cannot allow our institutions to cling to the notion that ESG and defence are mutually exclusive, and that companies building national capability are somehow a societal problem to be starved of services and capital.
As One9 – a Canadian defence technology VC platform recently acquired by Kensington Capital Partners- observes, defence “is an ESG force multiplier”. It argues that “if a government cannot protect its people and interests, then even the best-intentioned social engineering programs are meaningless”.
There are steps that the government can take today to bridge the gap between ESG and defence. For example, any tax advantage (ESVCLP, ESIC) offered should not be offered to companies that explicitly exclude defence and national security.
Given the fact that misguided ESG mandates have set back defence investment and innovation over the past few years, it would also make sense to super-size some of those benefits considering the dire strategic situation we find ourselves in.
Another aspect would be to ensure that businesses that receive government concessions do not prejudice national security. If they do, those concessions must be subject to revocation. For example, if a bank refuses to provide services to a national security-related company due to ESG-related concerns, it should be disqualified from the Financial Claims Scheme, which protects deposits up to $250,000 per account holder in the event of a bank, building society or credit union failure.
For the sake of national security, we need to follow Euronext’s lead and rewrite our ESG mandates that treat defence investment as unethical, instead of essential to preserving the freedoms ESG relies on. The fact defence isn’t carved into the G of ESG is a misinterpretation of ESG principles.
Unless we provide financial incentives for our top defence innovators, reform rigid procurement processes and revise restrictive ESG mandates, we risk failing our soldiers and undermining Australia’s national security.
Let us act now while we still have the luxury of choice.
By Steve Baxter, founder and CEO of Beaten Zone Venture Partners
This article was first published by The Australian