OPINION: Defence tech starved by false Environment, Social and Governance red flags

The rise of dictatorships, including those of Russia, China, Iran, and North Korea, combined with organised state-backed terrorist groups, most prominently in Middle East, render today’s geopolitical environment among the most volatile. As well the hot wars of recent years and those ongoing, we are seeing the rapid proliferation of grey zone warfare. As recently as November, a Chinese navy frigate deliberately injured Australian Navy divers. Beyond this, state-funded cyber-attacks regularly threaten national security and critical infrastructure – power grids, data centres, satellites and undersea cables are all at risk – and GPS spoofing can throw shipping routes and supply chains into complete disarray. Although occurrences of grey zone warfare are deliberate methods to avoid conflict, they will inevitably trigger a hot war at some point. This makes it all the more critical for Australia to solidify its sovereign defence credentials. The despots governing our adversaries only understand brute force, making deterrence the best strategy to protect our borders, national interests and citizens. But sovereign capability takes time to develop, and it’s not something that can be started during a war when the resources are stretched, time is constrained, and supply routes are cut off. We can’t afford to ‘wait and see’, rely on the tools of history’s wars, or place our fate entirely in the hands of allies’ rescue efforts. As it stands, our ability to establish adequate deterrence is hampered. Despite popular belief, it’s not the Government that makes defence items across Western countries (although they do conduct military research programs). The vast majority is done by private industry, under military contracts to the Government. Business to Government (B2G) takes far longer than business to consumer (B2C). Initial evaluations, trials and small deployments can take years before purchases start. The companies behind those capabilities, especially smaller ones, need to survive that initial period without orders. In a best case scenario (and specific sub-industry dependent), it can take 6 to 12 months – at worst, 5-10 years – before capabilities land at scale in the hands of our defence forces. Herein lies the challenge. The Commonwealth’s defence budget and grants play their part, though it is integral for Australia’s fund managers and investor community take an active role in supporting the local defence industry, as that ultimately supports our rules-based order and way of life. Fundamentally, defence enables for us to continue our life in a sustainable way by providing deterrence against prospective aggressors. Unfortunately, misconceptions about the suitability of defence companies to investments increasingly underscored by environmental, social and governance (ESG) policies has blocked ample funding funnels from reaching these organisations. Defence companies are brushed aside – frequently equated to heavy carbon emitters, tobacco, pornography, or similar ESG red flags. The situation could become more dire amid the introduction of tighter ESG rules and regulations for investors globally. Treasurer Jim Chalmers recently remarked on the potential benefits defence can glean for superannuation funds, with IFM Investors stating it holds no ESG concerns around defence investment, labelling it a win for its members and the nation. Although counterarguments from The Australia Institute’s Allan Behm raise a valid concern over the byproducts from military equipment that can have a tangible environmental and societal impact, passive and deterrent capabilities can’t be cast under the same light. It’s detrimental to defence technologies and local innovation which generate capabilities that are not lethal nor harm to humans or the environment. The upside is that attitudes are seemingly shifting, with Morningstar Inc pointing to 1,238 funds with ESG targets backing stocks in the aerospace and defence sectors, especially in North America and Europe. However, locally, the defence technology space remains starved. Australia is home to leading defence technology innovation, with a number of ESG-compliant public and privately-held businesses protecting national interests through their support for the defence industry. However, our nation’s effective preparation to defend in a future conflict will, at least in part, rely on these organisations – as well as those to be founded in coming years – no longer being regarded in the same manner as ESG offenders and therefore backed to develop capability for our defence efforts. Oleg Vornik is CEO at DroneShield. For Editorial Inquiries Contact: Editor Kym Bergmann at [email protected] For Advertising Inquiries Contact: Director of Sales Graham Joss at [email protected]