2023-Public-Sector-Perspectives

As a result of these developments, the defense sector, which was traditionally excluded from ESG frameworks, is now viewed by some stakeholders as intrinsically linked to UN SGD 16, which addresses peace, justice and strong institutions. Multiple governments and multinational organizations now emphasize the defense sector’s ESG value. For instance, the EU’s Platform on Sustainable Finance’s final report on the Social Taxonomy, published in February 2022, is notably more accommodating of the defense industry than had been expected. While it does not classify weapons as social goods, it specifies exclusions only for certain types of weapons rather than weapons in general. Supporting the industry as it transitions The reassessment of many countries’ defense requirements now underway following Russia’s invasion of Ukraine (and growing geopolitical tensions elsewhere), combined with the perceived enhanced ESG credentials of defense companies as a result of the altered security environment, are creating a new era for the defense sector. As defense companies navigate this emerging environment, they — and governments procuring defense products and services — will require financing and support. In particular, there is a growing need for innovative finance solutions as governments procuring aerospace and defense products look to address balance sheet constraints, cash flow management, risk sharing and other budgetary considerations, such as accounting for spending as opex or capex. In particular, government defense spending is often part of multi-year contracts under which a series of products and services are delivered. Governments therefore make multiple milestone payments associated with procurement, production and delivery and may benefit from deferred payment schemes. Citi has developed several solutions to address these dynamics, including structured risk solutions, receivables discounting, deferred payments, public-private partnerships for project financing and sovereign leasing of assets. Citi has longstanding relationships across the defense sector and with democratic governments and multilateral institutions such as NATO. The bank has the scope and capacity, through its clear policy framework and its digital and operational footprint, to facilitate business execution, trade digitalization and risk mitigation, and is committed to increasing support to the defense sector. Moreover, Citi has the experience and expertise required to deliver the innovative financing solutions the industry now needs (Figure 3). The reassessment of many countries’ defense requirements now underway following Russia’s invasion of Ukraine (and growing geopolitical tensions elsewhere), combined with the perceived enhanced ESG credentials of defense companies as a result of the altered security environment, are creating a new era for the defense sector. 36 A New Era for the Defense Industry