Labour MPs believe the Chancellor must go further and faster with her plans to ensure British defence companies are not blocked from banking facilities because of ethical concerns
Labour MPs are warning Rachel Reeves that she needs go further and faster in her plans to ensure British defence firms are not denied banking facilities and investment over ethical concerns.
Last week, The i Paper revealed how leading defence companies were being excluded from opening bank accounts, obtaining loans or even attending investment meetings as they were linked to potential “lethal” activities or not being “green” enough.
The growing concern for some in the defence industry, who fear they are being “debanked”, comes as the Government is hoping to turbocharge the sector in the wake of the Trump administration pulling back from supporting European security.
The Government has recently promised to increase defence by £6bn a year and Reeves is keen that small and medium-sized defence manufacturing firms help drive economic growth.
The difficulty for defence firms in getting support from mainstream financial institutions has been paralysing for some. One company that makes armoured vehicles used by the British military has being turned down by HSBC for a bank account and another involved in using AI to help the army is now considering relocating to the US.
In August, Reeves said she will bring in legislation to increase the transparency of so-called Environmental Social and Governance (ESG) red-tape that critics say guide investors away from the UK defence sector.
However, Labour MPs believe this is not enough and want the Chancellor to launch a taskforce across government departments to tackle the issue urgently.
Tan Dhesi, Labour’s Defence Select Committee Chair told The i Paper that the Government needed to take “prompt action” as more firms speak out about the issues they face.
He said: “We are currently living in a more volatile and unpredictable world. In response, we must strengthen both our military and defence industrial base. While environmental, social, and governance (ESG) requirements are important for responsible and sustainable investment, the current setup labels all defence investments as unethical, greatly impacting the expansion of industries vital to our national security.
“Hence, it would be misguided to let our British defence industry be held back, while our adversaries and others ramp up their military capabilities at an alarming pace. So the Government needs to take prompt action with reforms and new guidance.”
Meanwhile, newly elected Labour MPs Alex Baker and Luke Charters said that the Government needed to launch a cross-departmental taskforce over the issue.
They said: “We recently chaired a roundtable at the Guildhall bringing together the Defence and Financial Services sectors. One message came through loud and clear: banking and financing barriers are holding back some of our most innovative and impactful defence companies in the UK. In these uncertain times, the need to support these companies, not hinder them, couldn’t be clearer.
“We’re calling for the Government to launch a cross-department Taskforce to look at the broader banking & finance challenges faced by the defence sector.
“There is nothing more ethical than giving the Ukrainian people every ounce of support that we can. That starts with firing up our defence industrial base so we can defend our country and support our allies.”
Their views are backed by many in the Conservative Party.
Shadow defence secretary James Cartlidge told The i Paper: “I met a number of companies who said they’d been denied banking services because they were involved in defence. I therefore worked with then Economic Secretary, now Shadow Business Secretary Andrew Griffith MP, to look at how we could address ESG and its impact on defence. I hope the Government will take that work forward, and be robust in stating to the UK investment community that it is ethical to invest in the defence of our nation and our democratic values.”
Earlier this month more than 100 Labour MPs and peers wrote a letter to banks and financial institutions urging them to consider defence companies as ethical vehicles.
One defence source said that most of the industry think government reforms should “go further” than what the Government is currently planning.
Matt Williams, chief executive of Brigantes, a military equipment company said: “[We] have faced significant challenges securing banking support and funding lines..The Government has the opportunity and power to change things quickly and with purpose. Now is the time to act to enable UK defence to do its job protecting the nation.”
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A government spokesperson directed The i Paper to a previously published comment, which read: “National security is a foundation of this government’s Plan for Change, which is why we will increase defence spending to 2.5 per cent of GDP by 2027 and why we have been clear that we see no conflict between sustainable investment and investment in our world-leading defence sector.
“If opaque ESG ratings are blocking vital private investment to our defence sector, this has to change. That’s why we are bringing forward new legislation this year to boost investor confidence by driving more transparency in ESG ratings and we continue to consult widely with defence and financial services stakeholders to tackle barriers around access to finance.”
A UK Finance spokesperson said: “The UK banking sector is fully committed to supporting defence companies… Providing finance in this area is complex, and banks can face the threat of violent protest.They must also ensure they comply with a range of domestic and international laws and regulations.”
An HSBC spokesperson said: “We have always taken a very responsible approach to the defence sector, and we will continue to do so.”
What is ESG?
ESG (Environmental Social, Governance) criteria are a set of principles used by companies to assess their effects on the environment, society and how good their governance is.
Major institutional investors including pension funds use the criteria to guide decisions over investments, which has seen several defence firms report a drop in investment.
The principles have been championed in the business world since the mid-2010s, after the goals were championed in UN climate conferences.
The ratings soon became popular during the ethical investing boom during the pandemic, with ESG funds proving particularly popular in Europe.
The movement has been credited with propelling “green” stocks including Tesla and AstraZeneca, for their environmental and social benefits respectively.
However, there has been a backlash to the movement over concerns about the inherent logic of sustainable financing, and how the label is applied.
ESG funds have included Chinese national bonds, the company that supplied cladding for Grenfell Tower and oil and gas companies. Meanwhile, some funds short carbon intensive companies to be deemed as carbon positive.
Other ESG funds have courted controversy by threatening to exclude companies who work on nuclear (including nuclear weapons such as Trident) from investment, which has discouraged some companies from bidding for Government work.
The Government announced plans to define ESG ratings more clearly last year, amid concerns the label was being misapplied and retail investors were unclear on what they were investing in.
