‘Critical moment’ as EIB wrestles over move into weapons financing

The European Investment Bank’s rules are clear: They ban the financing of “ammunition and weapons” as well as “equipment or infrastructure dedicated to military/police use.” But for how much longer? A battle is underway to secure the future direction of one of the world’s biggest multilateral financial institutions, one triggered by Russia’s ongoing assault on Ukraine but with huge implications for its world-leading development work — and it will come to a head at a meeting on Friday, April 12. Should the EIB stick to the ethical stance that saw it call time on fossil fuel projects and make sustainable development its “foundation” purpose, or should it bow to huge pressure from European Union leaders to join the resistance to Vladimir Putin’s growing threat by pouring money into weapons? It is a decision with moral, economic, and practical implications — a “critical moment for the institution,” said worried civil society groups, even an “existential question” as one source familiar with the bank called it. The pressure to change course comes from the very top, from the European Commission President Ursula von der Leyen in a new European defense industrial strategy widely seen as the centerpiece of her bid for a second term in power. Unveiled last month, the strategy urged the EIB to “adapt defence-related exclusions” to “support production of military equipment and more generally the European defence industry” — and to do it quickly, by taking “all necessary steps to review its lending policy this year.” The European Parliament has backed the move and the bank’s new president, Nadia Calviño, appears keen, declaring it “ready to do more to contribute to European security, protection and deterrence” in her “vision” for its future. However, none of these players will make the critical decision. That is where this week’s showdown comes in — a meeting of finance ministers from the 27 member states of the European Union, which jointly own the EIB, in Luxembourg on April 12. Opinion is divided in EU capitals, a split often seen as being between hawks that border Russia, including Poland, Finland, and Lithuania, and the doves more geographically distant from the Kremlin, such as Ireland, Spain, and Portugal. A simple majority of the 27 carries the day if those countries also deliver a majority of the bank’s capital base — so a recent letter calling for a rethink of “the list of excluded activities” appears hugely significant, given it was signed by 14 of the 27 who together account for around 76% of capital. But now things get more complicated. What exactly will the member states be discussing or voting on, given the EIB already finances “dual-use” products, services, and technologies — those that can be “used for both civil and military/police purposes”? Even now that work is expanding, with €8 billion earmarked for “dual use” investments through its Strategic European Security Initiative, and a €175 million Defence Equity Facility, run by its subsidiary the European Investment Fund, for small-scale cybersecurity, border protection, space, and drone projects. While the Commission and the Parliament want to lift the ban on “military equipment,” the European Council — the heads of the 27 governments — used more cautious language in a close-of-summit communique last month, urging the EIB to “adapt its policy for lending to the defence industry and its current definition of dual-use goods.” Some opponents of a policy shift within the bank were relieved there was no direct reference to weapons, Devex understands, believing it is possible to deliver that mandate without making dramatic and controversial changes. The plan put before finance ministers will be based on the council’s statement, not the commission’s, because “they are our shareholders.” That belief was rejected by Frank Vanaerschot, the director of Counter Balance, a Brussels-based campaign group pushing for EIB reform, who suggested it would still send defense investments soaring. “The EIB is a development bank. Defense is not part of that. This also counts for widening the definition of so-called dual use investments, which can have both military and civilian purposes,” Vanaerschot told Devex. “It would make arms spending increasingly dominant in the EIB's portfolio and should be firmly rejected. The bank should focus on its main public policy goals — financing the transformation towards an economy that respects environmental limits and economic and social cohesion, which require a vast amount of public investment.” Counter Balance is among 15 organizations that have signed an open letter calling the decision “a critical moment” that “threatens to fuel conflicts with proliferation of arms production globally.” Leaving aside the moral issue, some foresee an economic hit from a shift to what is sometimes described as “pure defense” financing — because it would put the EIB’s cherished top-notch credit and environmental, social and governance, or ESG, ratings in jeopardy. The bank receives no funding from the EU budget, instead raising money by issuing bonds on financial markets — borrowing at lower rates because it is triple-A rated by the leading credit agencies and favored by investors because its ESG performance is “among the best of its peer group.” One of the world's leading ESG rating firms, Morningstar Sustainalytics, warned recently that the EIB’s score would be reassessed if it began funding military equipment, potentially increasing the costs of lending for development and climate projects both inside and outside Europe. Mikaela Gavas, managing director of the CGD Europe think tank, told Devex the shift would raise “serious concerns around the EIB’s ability to raise capital on the markets and its continued compliance with ESG criteria.” “If it goes ahead with this change, the EIB runs the risk of losing its clients, losing its credibility, losing its focus on investing in the green transition, and losing its reputation as the world’s largest Climate Bank that it took such pains to build,” she warned. A third issue is what practical difference a rewriting of the EIB’s rules can make in deterring a Russia whose arms production is now on a wartime footing? Only much higher defense spending by nation states can tip those scales, it is argued. “It is hard to see how the EIB changing its policy and investing a few billion euros in weapons would be enough to swing the balance. That won’t stop Putin on its own,” said a source familiar with the bank, who spoke on condition of anonymity. “However, some member states see this as an emergency situation. Others don’t want the EIB to become an instrument of EU policy and to instead focus on where it can add value, in climate, education, or energy,” said the source. “It is an existential question for the bank.”