Redefining ESG: A European Shift and Its Implications for New Zealand

European stock exchanges are redefining the traditional framework of ESG (Environmental, Social, and Governance) investing to include defense and security under a new paradigm labeled “energy, security, and geostrategy.” This move, spearheaded by Euronext, is part of a broader geopolitical strategy to bolster European defense industries and reduce reliance on U.S. military hardware. The implications of this shift challenge long-standing ethical investing norms, particularly in New Zealand, where ESG metrics have been a cornerstone of corporate reporting.

The redefinition of ESG comes in response to a “new geopolitical order,” as stated by Euronext’s CEO Stephane Boujnah. European aerospace and defense companies are being encouraged to invest in innovation and production to ensure strategic autonomy over the next decade. This shift is not merely semantic; it has tangible consequences for how investments in defense-related sectors are evaluated and categorized.

European nations have committed to increasing defense spending to 5% of GDP annually by 2035, with at least 3.5% dedicated to core defense requirements and capability targets. The remaining 1.5% will be allocated to protecting critical infrastructure, defending networks, and strengthening the defense industrial base. This strategic realignment has prompted Euronext to revisit its ESG index methodologies, aiming to limit the exclusions traditionally placed on defense companies.

The move has raised questions about the future of ethical investing in New Zealand, particularly for entities like the New Zealand Super Fund and KiwiSaver funds. These funds operate within a framework that balances ethical considerations with financial performance. The challenge lies in reconciling the new ESG definitions with the principles of ethical investing, especially when it comes to investments in sectors such as aerospace, quantum computing, and drone manufacturing, which may have military applications.

European Commission President Ursula von der Leyen has highlighted the potential for mobilizing up to €800 billion to strengthen Europe’s defense industry. This substantial investment could create opportunities for New Zealand companies like Dawn Aerospace, which has operations in both the Netherlands and New Zealand. The company’s dual presence positions it to benefit from the growing European defense market while maintaining its New Zealand roots.

The recent NATO summit in the Hague underscored the urgency of the geopolitical shift. NATO allies reaffirmed their commitment to defense spending, with New Zealand’s Prime Minister Christopher Luxon being the only Indo-Pacific leader to attend. While Luxon stated that New Zealand remains committed to its defense spending target of 2% of GDP over the next decade, the evolving global landscape suggests that increased preparedness may be necessary.

In the Netherlands, where the lessons of World War II still resonate, there is a growing recognition of the need for strategic preparedness. The Dutch Ministry of Defence is seeking to enhance its port infrastructure in Rotterdam to handle military cargo, a move that aligns with NATO’s strategic goals. This development reflects a broader shift in European defense policy, one that New Zealand must now navigate in its own investment and policy frameworks.

As the global order continues to evolve, the redefinition of ESG in Europe serves as a reminder that ethical investing is not static. It requires continuous adaptation to new geopolitical realities while maintaining a commitment to transparency and accountability. For New Zealand, the challenge lies in balancing these evolving norms with its own values and strategic interests.