Environmental change isn’t just a humanitarian concern, it’s a mechanical one. From jet engines to toll roads, shifting climates are reshaping military readiness, infrastructure resilience, and the investment case for the companies that build and maintain such assets.
What does a US-based jet engine manufacturer have in common with an Italian toll road operator? Much has been written about how ESG (environmental, social and governance) investment principles might affect military hardware manufacturers. Far less has been written about how the environment may affect military hardware and its manufacturers, and the essential infrastructure used for both military and civilian purposes.
Stress-tested by nature
It is our contention that changes in the environment will increase the cost of military preparedness and increase the attractiveness of the bonds of both the producers of military equipment and the operators of European toll roads.
Infrastructure overlap
Could climate change result in less money for equipment? If military organisations have to spend billions repairing items, or building protective civil works, does that take away from the equipment budget? So far, it appears that relatively wealthy countries, which the large military spenders tend to be, always find ways to manage these competing needs. A good example of this is the recent discussions around increased military expenditure within NATO members. When pressed to increase spending to higher portions of gross domestic product, some members responded by expanding the scope of what could be included in the concept of ‘defence’. One perhaps incongruous item that has long been included in such spending is mobility infrastructure.
It is broadly recognised that certain civil works are needed in order to sustain military readiness. If there were no rail network, airports or roads, one might query how useful it would be to have military equipment. So, there is a balance to be had. Within the European Union there is an Action Plan on Military Mobility (APMM), which includes road transport. The plan makes the point that there is a high degree of overlap (more than 90% ) between the road infrastructure deemed to be of military significance and the roads within the Trans-European Transport Network (TEN-T), a network of roads, railways and water infrastructure within EU borders. TEN-T forms part of the operational networks of investment grade bond issuers including Autostrade, Vinci, ARRP and Abertis.
The APMM may help toll-road operators for two reasons. As it has been adopted by the European Commission (EC) there is actual funding behind it that could be available to help member states with the portions of the network that lie within their boundaries. By designating these as high priority infrastructure corridors, it would seem to open up the possibility of member states improving this infrastructure within their national frameworks without breaching state aid rules around financing for private firms. This has not been tested, but it would seem at least incongruous – and arguably absurd – were a member state to upgrade a militarily important section of motorway, but by facilitating that work find itself accused of anti-competition activities by the EC, the very body which designated this to be a priority. If this is the case, toll road operators within Europe who issue investment grade corporate bonds may find it easier to get investment cases agreed with government regulators, to the benefit of their bondholders.
The bottom line
Based on past spending patterns, and current geopolitical posturing, it is likely that the wealthy economies of Europe, and the US, will find ways to increase spending to deal with their burgeoning equipment and mobility priorities. This will be to the benefit not only of defence manufacturers but European road operators as well.
As investors we will continue to monitor how environmental pressures shape both strategic priorities and operational realities. The intersection of climate resilience and defence is no longer theoretical – it’s investable.
