“Defence” Isn’t a Dirty Word; It’s an ESG Force Multiplier
The war in Afghanistan roused Canadian society from a patriotic slumber and reminded Canada of its long and proud military tradition. But the war dragged on without clear markers of success and the price paid by Canadians in blood and treasure soon caused many to rightfully question the purpose of it all. The burst of patriotism that once greeted returning troops, and caskets, seemed to end with the war and Canada's views towards its Forces and the wider international security situation was instead replaced with malaise and indifference.
Canada appeared to return to its default post-Cold War setting wherein anything too militaristic was viewed as almost antithetical to Canadian values. This could often be traced to a desire to differentiate ourselves from our trusted allies to the South, as we witnessed their decades long struggles in the Middle East. But it also reflects a complacency on the part of Canadian governments and citizens alike, based on a somewhat naïve assumption that the use of force could be avoided, or that our American brethren would always be there to use it for us. Sure, we would from time to time send a token force to one operation or another as gestures of goodwill, but one need look no further than successive defence budgets and the state of our Canadian Armed Forces (CAF) to realize that not only is defence not a national priority, it has become an afterthought - a problem we'd rather not talk about, let alone confront.
If a government cannot protect its people and interests, then even the best- intentioned social engineering programs are meaningless.
The outbreak of war in Ukraine and the increased threat landscape in the Indo-Pacific have once again forced Canadians, and the government, to confront the harsh realities of the 21st century. Canada has responded by contributing both money and materiel to Ukraine, announcing NORAD modernization efforts and releasing its Indo-Pacific strategy. Yet even when faced with these myriad challenges to the rules-based order, many within Canada, and in particular the investment community, continue to treat "defence" as a dirty word.
Defending the realm
"Above all else, Canadian security and prosperity remain Canada’s primary strategic interests. These interests support the Canadian way of life and are critical to ensuring that Canadians can flourish and go about their daily lives without fear." These words are found in the last defence policy published by Canada in 2017, Strong, Secure, Engaged (SSE), and reflect the primordial and self-evident fact that the first obligation of any government is the defence of the realm. If a government cannot protect its people and interests, then even the best-intentioned social engineering programs are meaningless. Indeed, it is only through securing national and collective defence that a country's courts, markets and social spaces may flourish.
The policy goes on to observe that "other factors, including global stability, the primacy of the rules- based international order, and the principle of collective defence underpin Canadian security and prosperity ... Canada must therefore also promote and protect these interests to ensure that Canada can remain secure, continue to prosper, and exert positive influence on the international stage."
SSE thus explicitly recognizes that Canadian security is enhanced when we help our allies achieve security abroad. This makes particular sense when we recall that, like it or not, Canada is part of the Great Power Competition. As mentioned in our previous article, and as also recognized by SSE, innovation of dual-use technologies, through partnership with industry, must be unlocked for Canada to realize its technological potential.
We believe that venture capital is the key that will most quickly and efficiently open this lock.
ONE9 Special Mission Fund I
The best time to plant a tree...
Accepting that “Canadian security and prosperity” are the government’s primary strategic interests, the Great Power Competition is real and that technological innovation through partnership is the best way to meet the demands of those tasked with maintaining our security, why then in Canada are dual-use technologies shunned in so many discussions around investment?
At the risk of sounding trite, freedom, in fact, isn’t free. Investments must be made for relevant technologies to be developed, validated and scaled, the bulk of which will benefit citizens as much as the defence, intelligence, and national security communities. Moreover, these investments do not bear fruit overnight. Even with the West’s, and particularly the US’, increased spending in response to the war in Ukraine and an increasingly aggressive China, there is concern that it isn’t enough to maintain our comparative advantage. If this is the case in the United States, where does this leave Canada when a significant portion of our investment community’s theses do not reflect the government’s primary strategic interests?
goTenna
Despite the clear and present 21st century geopolitical dangers, there is a common refrain in this country that investments in technologies with ostensible defence and national security applications do not rightly belong under the Environmental, Social, Governance (ESG) umbrella. This has been heard equally from both private investors and certain Crown Corporations, all of whom aim to invest in deep and emerging tech. These same investors are quite comfortable investing in cyber security, a technology critical to national security, but they blanche when technology based on the same or similar digital foundations might be put in the hands of soldiers defending our very freedoms. This is all the more puzzling when we recall that the line between technology and so-called defence technology has been forever blurred by both technological advancement and the nature of the Great Power Competition.
But first, a very brief primer on ESG
ESG broadly functions in two ways. At the more micro level, ESG operates as a set of investing metrics meant to measure and mitigate investment risk in particular companies. “Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.” It is also important to mention that universally agreed upon ratings under each head have yet to emerge and they can vary significantly from one fund to the next.
At the macro level, ESG has come to function as an overarching thesis allowing socially conscious investors to include or exclude companies based less on actual indicia of risk, but more on overall “fit”. Some investors’ ESG criteria, for example, preclude investment in companies that “operate in higher-risk areas or have exposure to coal or hard rock mining, nuclear or coal power, private prisons, agricultural biotechnology, tobacco, tar sands, or weapons and firearms.” Companies involved with coal or tar sands make more obvious sense under the Environment head, but weapons and firearms companies may not actually offend the micro ESG factors. Investors may nonetheless wield ESG as a justification for avoiding sectors and companies for more philosophical reasons, and when it comes to “defence”, these exclusions are most often justified under the Social head.
The very nature of dual-use technology is such that it is naïve, if not impossible, to say that most investors are not already investing in defence.
To be clear, we are not advocating that defence contractors involved in the production of kinetic weapons be explicitly included in ESG. ONE9’s Special Mission Fund I investment thesis unambiguously states that we will not invest in such things. We merely ask that the investment community not reflexively shy away from investments in dual-use technology when it is so evidently beneficial to consumers, industry and the government alike.
Defence as an ESG force multiplier
Just as ESG criteria are not written in stone, neither should investors dogmatically discount “defence”
for falling outside the ESG umbrella. Indeed, a closer reading of SSE reveals that Canada’s strategic defence-related objectives are wholly reflective of, and intertwined with, traditionally understood ESG criteria:
Environment
“Climate change threatens to disrupt the lives and livelihoods of millions around the world. It also presents us with an urgent call to innovate, to foster collective action, to work hand-in-hand with like-minded partners around the world to meet this threat and beat it, rather than stand passively by.”
Social
Canada “must be part of the solution – a force for security, stability, prosperity and social justice in the world.”
Governance
“Canadian international engagement will be guided by the core Canadian values of inclusion, compassion, accountable governance, and respect for diversity and human rights.”
The broader American ESG market has come around to this realization. “Russia's invasion of Ukraine further highlights the ESG market's shifting priorities. Suddenly, energy security, food security, and poverty reduction [have taken up] positions alongside climate change as critical issues supported by ESG funds.” Moreover, defence stocks have become “apolitical ... [t]hese are now vital securities with national interest.”
If the wider investment community is now able to shift its priorities and definitions to accommodate weapon-making defence stocks and nuclear energy, it should not be difficult to bring the holdouts around to the value of dual-use defence investments. Such investments allow not only for diversification, but, perhaps more importantly, they also allow investors to align themselves with national strategic priorities, which impact the boardroom as much as the battlespace.
Canadian Armed Forces
Such an approach would, in fact, follow a long history of investments in dual-use technologies that have resulted in truly life changing outcomes, such as the internet, rocketry, GPS, digital cameras, drones and even duct tape. The important difference that must now be appreciated is that government programs no longer lead the way in technological development. Private capital must therefore fill this gap, but in so doing, it will bring the speed and dynamism to bear that have always been the hallmarks of our capitalist system.
The very nature of dual-use technology is such that it is naïve, if not impossible, to say that most investors are not already investing in defence. The fact that Amazon and Microsoft are some of the largest defence contractors in the US should amply demonstrate that nearly everyone is investing in defence, and national security, in one way or another. Imagine then how strategic and thoughtful investment in dual-use technologies and companies could act as a force multiplier in Canada’s, and the West’s, efforts in the Great Power Competition.
We are not questioning an investor’s prerogative to develop and implement an investment thesis that reflects their values. Nor are we questioning the utility of ESG as a unifying theory of investment. We do, however, believe that when it comes “defence”, specifically dual-use technology, a more expansive view must be adopted to account for the geopolitical challenges facing Canada and her allies in the 21st century. We simply do not have the luxury of pretending otherwise.
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