The head of Nato has said “crazy” ethical investing rules are thwarting Europe’s efforts to ramp up defence spending.
Mark Rutte, general secretary of the transatlantic military alliance, said that finance companies were withholding money from defence companies after effectively putting them into the same category as drug dealers and pornographers.
He blamed ESG (environmental, social and governance) rules, which are used by many big banks, asset managers and pension funds to decide where to invest savers’ money.
Speaking at a side event in the World Economic Forum in Davos, Switzerland, Mr Rutte said: “We still are not able to explain to the pension funds, to the banks, the difference between illicit drugs and pornography on the one hand and spending on our collective defence on the other.
“And somehow it’s all the same basket. This is crazy, but this is one of the reasons why I’m trying to reach out to the one billion people living in Nato territory and asking them: go to your banks and your pension funds and tell them that you want to be defended and you want them to spend more.
“And that it is crazy that somehow we only have these nice little projects connected to the [United Nations] Millennium Goals.”
The Millennium Goals are a set of eight targets for “sustainable development” agreed by the UN in 2015, which include promoting gender equality, eradicating extreme poverty and hunger, and reducing child mortality.
Mr Rutte said: “First of all, we have to make sure we can fight the Russians if they attack us.”
He was supporting remarks by François Michel, chief executive of Belgian defence manufacturer John Cockerill, who claimed that ESG risked “destroying the European defence industry”.
Mr Michel said: “Clearly there is an issue with the ESG regulations on the financial side because, whatever the regulations we have in Europe in general, finance has been pushing the defence industry to sit apart from civilian infrastructure and from civilian activities.
“This is destroying the European defence industry, this is something we absolutely need to solve, and I fully agree with the fact that public spending is not the only answer.
“Private capital has to be able to flow efficiently between savings and companies.”
The comments are the latest warning that ESG is having disastrous consequences for Europe’s defences.
Earlier this month, Admiral Rob Bauer, chair of Nato’s military committee, claimed that “stupid” investors were failing to play their role in the collective defence of society while also missing out on potentially large returns.
Since Russia launched an attempted invasion of Ukraine in 2022, Nato member states have been ploughing money into arms as part of efforts to rebuild their own capabilities and support Kyiv’s warfighting efforts.
However, Mr Rutte warned that arms production in China and Russia was dramatically outpacing the US and Europe, where there is a particular need to replenish depleted ammunition stocks. He said more private investment was needed to expand manufacturing capacity.
“All over Nato we produce in a year, in terms of ammunition, what Russia is producing in three months,” he said.
“So this is evidence that we have huge problems, and that’s why my plea is, yes, we are safe now but in four or five years, if we do not ramp up production and do not ramp up spending, then we are really into difficulty.”
The Dutchman reiterated that Nato’s spending target of 2pc of GDP was “clearly not enough”, amid calls by Donald Trump, the US President, for European countries to shoulder more of the burden.
He said discussions about higher government spending by Nato states were under way and a deal would be hammered out at a gathering in June.
Mr Trump, who returned to the White House on Monday, is reportedly pushing for spending targets of between 3pc and 5pc of GDP. Experts have warned this will be extremely difficult for many countries to meet.
The President has accused Europe of freeloading off American taxpayers and warned the US may not come to the aid of countries found to be “delinquent”.
The UK currently spends around 2.3pc of GDP on defence. Sir Keir Starmer, the Prime Minister, has vowed to lay out a “path” to reaching 2.5pc following a UK defence review but this may now be delayed until the autumn, setting up a potential clash with the US President.
Speaking in Davos, Mr Rutte warned that higher spending looked inevitable.
He said: “When you look at the emerging reality, it is clearly the case that 2pc is not enough.”
He also criticised a lack of coordination between European Nato members, which was leading to smaller, more fragmented and costly equipment programmes.
Mr Rutte pointed to the two multi-billion pound stealth fighter programmes being developed as a prime example of this: one by Britain, Italy and Japan; and a second by France, Germany and Spain.
“We are developing two competing, sixth generation fighter jets. So this is evidence that it is still very difficult in Europe to work together, and this is the big problem,” he said.
In the US there are around 30 weapons systems, compared to nearly 180 across the European militaries.
“We have really a problem here,” Mr Rutte said “We are not buying jointly, almost not. The contacts are too small, and we are innovating too slowly.
“And when you look at Ukraine, you can see how important it is that you do that.
“Of course, for Ukraine itself, it remains the case that we have to do everything to make sure that we can change the trajectory of that conflict.
“We need the US in that, but I expect the US to ask for us to pay more for their delivering - I think we have to prepare for that, it’s only logical.”