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A research house that advises institutional investors has encouraged its clients to invest in Australia's defence industry.
In its first Responsible Investment Agenda report for 2018, CAER has said the increase in global defence spending and advancements in technology will be felt by defence companies looking to secure lucrative contracts and could provide investors in these companies with long-term gains.
"These increasing demands coupled with rapidly developing technology drive companies to develop and evolve weapons systems," the report said.
"This means that companies require investors to help fund the development and production of new weapons and weapons systems. Investors in turn seek to invest in companies that have a chance of high value, long-term contracts with governments."
CAER said Australian companies in the industry looking to win big will have extra support from the government agency Export Finance and Insurance Corporation, as outlined in the recently unveiled Defence Export Strategy.
"Australia is gearing up to support defence industry players to establish Australian bases specialised to deliver military services and goods to international markets. Target regions include close military allies such as New Zealand, the UK, Canada and the US, in addition to countries in the Indo-Pacific region and the Middle-East.
The report cautioned, however, that investing in such companies and technologies come with serious environmental, social and governance (ESG) risks, regardless of the government's export control policies.
"International military exports might open new markets, but they also open companies and their investors to a range of serious ESG risks. And while the government states “most stringent requirements are put in place through the permits process”26, investors are advised to carefully consider company safeguards," CEAR warned.
"In particular, companies involved in trading weapons and weapons components might be seen to contribute to uncontrolled arms proliferation that may fuel conflicts and human rights violations."