More than 100 Labour MPs and peers have urged banks and investment firms to relax their rules on investing in defence companies.
In an open letter, first reported by the Financial Times, they said “ill considered” ethical investment rules had been holding back their access to finance.
They wrote that a change in approach would help the UK bolster its defences, and contribute to the government’s drive to boost economic growth.
It also reflects a trend in recent years to emphasise the national security element of defence investment since Russia’s full-scale invasion of Ukraine in 2022.
Leading weapons companies have seen sales and their share price surge in recent years, as countries seek to rearm after years of declining defence spending.
The UK is among those countries committing to ramp up spending, with Sir Keir Starmer announcing plans last week to increase defence spending from 2.3% to 2.5% of national income by 2027, funded by cuts to overseas aid.
However in their letter, the politicians argued that environmental, social and governance (ESG) rules adopted by some banks and fund managers are continuing to impact the sector’s access to finance.
They said ESG rules, which can prevent investment in oil, tobacco and other sectors deemed unethical, had generally driven “positive change” in the economy.
But they added that financial institutions should “rethink ESG mechanisms that often wrongly exclude all defence investment”.
The letter was co-ordinated by the Labour Growth Group, a group of MPs formed last year in part to push the government to deliver major infrastructure projects.
‘Way of life’
Some investment funds have adopted specific rules against investing in weapons manufacturers and others have broader rules obliging them to consider the risk that investment could lead to human rights breaches.
But some analysts have pointed out that attitudes on the ethics of investing in the sector appear to have shifted in recent years, with the share of ESG funds holding shares in defence and aerospace firms on the up compared to 2022.
The previous Conservative government had also sought to encourage defence investment, with former prime minister Rishi Sunak arguing there is “nothing more ethical than defending our way of life”.
The Investment Association, the trade body for UK investment managers, signed a statement last year stating that investment in “good, high-quality, well-run defence companies” was compatible with ESG considerations.
Banking rules
In their letter, the MPs and peers also argued that defence firms faced “unnecessary barriers to doing business in the UK,” echoing longstanding complaints from the sector about access to finance.
ADS, the industry lobby group, has previously argued that defence firms face higher regulatory barriers when it comes to securing bank accounts and loans.
These include rules obliging banks to run enhanced money laundering checks for defence and security companies, and to make sure they are not financing weapons banned under international treaties.
The group has also said defence companies can often find it harder to provide relevant documents to banks because of national security considerations.
Finance UK, a group representing British banks, acknowledged that compliance rules could prove “complex” but said banks provided a “significant range of support” to defence companies.
David Raw, the group’s managing director for commercial finance, added: “We are continuing to engage with government and the defence sector to tackle any barriers that do arise.
“We do not see a tension between supporting ESG goals and supporting the defence sector.”
The UK-based Campaign Against the Arms Trade said it opposed any change to ESG rules on defence firms, adding it would benefit firms that “make vast profits from death and destruction across the world”.
