Defending the defensible: is the defence sector sustainable? Geopolitical instability and security concerns will boost particularly in Europe. While total defence expenditure defence spending for European countries continued to rise for a sixth How investors think about defence will likely change as year running – reaching EUR 198 billion in 2020 – this definitions of geopolitical conflict and war doctrine evolve. figure was equivalent to only 1.5% of the GDP of the 26 The need to increase financial resources to national European Defence Agency (EDA) member states.2 By security has risen up the agenda for governments, comparison, US defence expenditure dwarfs that of every 3 following the onset of war after a long period of peace other EDA member as highlighted in Exhibit 4. in Europe. The EU Commission’s change of approach to As conflict and defence evolve, the question is whether defence in its report on social taxonomy is another factor investments in the sector can influence the direction of for European investors. capital towards a more resilient defence infrastructure, How defence budgets are spent is also evolving. For and away from more controversial activities. example, prior to the Ukraine crisis, the UK had decided However, the rise in military expenditure among to redirect spend from defence personnel to focus more European countries shown in Exhibit 5 might spark new on cybersecurity and aerospace, while in the midst of the controversies by supporting innovative technologies, conflict, Germany pledged to invest EUR 100 billion to such as drones and autonomous weapons, which raise modernise its military. new ethical questions about their use and impact. But Defence budgets are expected to rise steadily in the these questions may take years to resolve, and a new coming years following a long period of underfunding, international agreement could be required. Exhibit 4: Top 10 countries by defence spending show their changing focus 16 14 12 United States of America 10 United Kingdom Saudi Arabia 8 Russia Korea Sout 6 aan USD billions4 ndia erman 2 ­rance €ina 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Source: Information from the Stockholm International Peace Research Institute (SIPRI), https://www.sipri.org/ Exhibit 5: Expected change in defence spending for selected European countries Target 2023 Target 2026 Target 2028 Target before 2030 Target 2030 3.5 3.0 2.5 2.0 1.5 1.0 Percentage of GDP0.5 0.0 Poland Romania Germany taly eden pain nited elgium ingdom % of GDP spending on defence previously % of GDP spending expected Source: Allianz Global Investors internal research 4