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More than 100 Labour MPs and peers have urged British banks and fund managers to stop viewing all defence investments as “unethical”, as they seek to boost the UK’s domestic arms industry.
Their open letter calls for the removal of environmental, social and governance (ESG) investment requirements that “often wrongly exclude all defence investment as ‘unethical’”.
It called for the banks to “sweep away ill-considered anti-defence rules” and turn on “the financial taps to the firms that stand ready to deliver the best of British innovation, capability and skills”.
The letter’s signatories include former Nato secretary-general Lord George Robertson, who is leading the government’s strategic defence review; former Royal Navy chief admiral Lord Alan West; and Labour chair of the commons defence select committee Tan Dhesi.
Alex Baker, the Labour MP who represents the British Army headquarters in Aldershot, spearheaded the letter, which is backed by the Labour Growth Group, a parliamentary caucus of backbench Labour MPs and peers pushing the government to prioritise growth.
The group argued that for too long companies with the ability to develop military technology at speed “have faced unnecessary barriers to doing business in the UK”, adding: “With defence manufacturers in constituencies nationwide, there is clear potential to drive economic growth.”
The Labour MPs and peers made clear they were not criticising the ESG model altogether, saying it is “rightly here to stay”.
But they added they believed ESG criteria were compatible with the “Ukrainian cause” and said: “We urge financial institutions immediately to sweep away ill-considered anti-defence rules which are acting as a barrier to doing what is right.”
Chancellor Rachel Reeves is keen to explore ways to encourage more private investment in defence, and supports the principle that such financing can be consistent with ESG standards, said people familiar with her thinking.
The government is also exploring plans to encourage Britain’s largest pension funds to invest more in defence as part of the next stage of the voluntary “Mansion House” compact, according to people familiar with the situation. The accord, signed by 11 pension funds with hundreds of billions of pounds of assets in their combined default funds, is due to be updated this summer.
The City of London Corporation, the local government for the capital’s business district, told the Financial Times some of the UK’s largest investors were in “early discussions” about how to raise the amount of investment across the growth-driving sectors outlined in Britain’s industrial strategy, including defence.
People close to Alastair King, Lord Mayor of the City of London, said he was keen to encourage signatories to specify what they are doing to invest in defence. “A strong defence and a thriving City are two sides of the same coin,” King wrote on LinkedIn last week.
The government has promised to slash red tape for defence contracts and make it easier for small businesses to benefit from a recent spending boost for the sector, amid concerns smaller players in the industry often struggle to get access to credit.
Reeves widened the parameters of the National Wealth Fund last week to enable investment in the UK defence industry in order to support Ukraine’s war effort.
On Monday, ministers announced plans for a hub to provide small and medium-sized businesses with better access to defence supply chains, alongside SME spending targets for the Ministry of Defence by June.
Evidence collected by ADS, the industry lobby group, found SMEs face challenges in securing vital funding needed for cash flow because of some banks’ reluctance to lend to the industry.
The group’s recent survey found lenders were more sceptical of working with the defence industry in part because of the perceived negative reputational risk of partnering with the sector.
Industry representatives have been holding regular meetings with UK Finance and TheCityUK about the issues.
The Labour Growth Group, which was set up last year, is increasingly focusing on economic and national security. Senior members believe Prime Minister Sir Keir Starmer’s response to growing geopolitical instability has put renewed impetus on the need for radical action to achieve economic growth.
The previous Conservative government, which criticised the sustainable ratings industry that underpins ESG investment, called for tighter regulation of the agencies that provide ESG ratings.
Former Tory defence secretary Grant Shapps warned ESG standards risked undermining Britain’s defence sector by limiting its access to finance.