European ESG rebrand challenges NZ ethical investing norms – Fran O'Sullivan

NZ Herald

17 hours ago

The US President has strong-armed Nato members into increasing their defence budgets to 5% of GDP.
However, the Europeans are determined their increased expenditure should boost their own defence companies – not simply be used to buy American military hardware and boost the profits of those American companies contributing to the US war machine.
Back here, New Zealand companies have devoted thousands of pages in successive annual reports to trumpeting their prowess on environmental, social and governance metrics (traditional ESG).
Some are required by law. Some frankly fall into 'feel-good' box-ticking (often notable among failing companies!) and a deflection from a company's true commercial driver, which is to post a profit and stay in business.
It is time for a rethink.
As with DEI (diversity, equity and inclusion) policies, which even BlackRock chief executive Larry Fink (a previous champion) has walked away from, there is a sharpening of focus.
At the Amsterdam Stock Exchange last week, chief executive René van Vlerken was quick to emphasise that the heightened geopolitical risks – obvious on Europe's backdoor where the Russian-Ukraine conflict verges on a 'forever war' – has made for the more existential approach.
The Amsterdam exchange is part of the pan-European stock exchange Euronext, which operates regulated exchanges in Belgium, France, Ireland, Italy, Norway, and Portugal as well as the Netherlands.
In May, Euronext's chief executive and chairman Stephane Boujnah said the redefinition of ESG was in response to a 'new geopolitical order'.
'European aerospace and defence companies have expressed the urgent need to invest heavily in their innovation and production capacities to guarantee Europe's strategic autonomy for the next decade,' Boujnah said.
Euronext said it would revisit the methodologies for ESG indexes to limit the exclusions currently placed on defence companies. This poses a challenge for traditional ESG ratings agencies when it comes to advertising investments in defence industry-related bonds (for instance).
It also has ramifications for entities like the New Zealand Super Fund and KiwiSaver funds, which walk a tightrope on definitions of ethical investing, with all sorts of activists getting exercised over where the funds invest.
How will funds approach investing in New Zealand companies ranging from aerospace to quantum computing or drone manufacturing – all within the scope of the Government's new defence plans – when there is a clear implication their products will be used in armed conflict?
Euronext has said it will encourage the rating agencies to restrict the concept of controversial weapons solely to armament activities prohibited by relevant international treaties.
What's at stake is not small bikkies.
European Commission president Ursula von der Leyen believes the EU could mobilise up to €800 billion ($1.55 trillion) to strengthen its defence industry.
There are also opportunities for Kiwi companies like Dawn Aerospace, with its dual base in the Netherlands and New Zealand.
I was in the Netherlands with 40 business leaders on the New Zealand Initiative think tank's Go Dutch study tour, which was designed to provide insights from small, advanced economies.
Fortuitously, our time in the Netherlands coincided with the Nato Summit in the Hague. It also coincided with the US attack on three nuclear facilities in Iran with 'bunker buster' bombs and Tomahawk missiles, which made for frantic rebooking of flights back to New Zealand after some airlines pulled back from flying over the Middle East.
Trump did attend Nato, being hosted overnight by the Dutch King and Queen in their personal palace before a truncated Nato meeting.
At the summit, the allies made a commitment to investing 5% of GDP annually on core defence requirements and defence and security-related spending by 2035.
At least 3.5% of GDP was to fit within agreed definitions of Nato defence expenditure to resource core defence requirements and to meet Nato's Capability Targets.
The other 1.5% was to be invested in protecting critical infrastructure; defending networks; ensuring civil preparedness, resilience and innovation; and strengthening the defence industrial base.
Prime Minister Christopher Luxon was also in the Netherlands.
He was the only political leader from the Indo-Pacific Four – Japan, Australia, South Korea and New Zealand – to attend the Nato Summit.
It was noted that he had turned up.
Luxon contends he was under no pressure to increase New Zealand's defence spending above the targeted 2% of GDP within the decade that was outlined in the recent Budget.
But this is a more dangerous world.
It was notable that when we visited Rotterdam – which hosts Europe's largest port and some fully-automated container terminals – that the Dutch Ministry of Defence wants to acquire terminal capacity for handling multiple ships carrying military cargo (mainly equipment and ammunition) simultaneously.
It has been agreed within Nato that this type of cargo can be transported via the Netherlands, even if the destination is outside the Netherlands.
In the Netherlands, where older Dutch people still hold sharply to the lessons from the Nazi occupation in World War II – and where they have more recently been hurt by soaring energy prices sparked by the withdrawal of Russian gas flowing to Europe via Ukraine – there is a quiet confidence.
With 26% of land under sea level, the Netherlands has developed extensive water management systems, including dikes, dams and polders (land reclaimed from the sea) to manage the obvious risk.
There is a frank realism there – we could do with a bit more here.
Disclaimer: Fran O'Sullivan met her own costs to take part in the New Zealand Initiative's Go Dutch study tour. These are her views.