City investors putting UK security at risk over ESG, ministers warn

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Britain’s long-term security is at risk from City of London investors who are refusing to back the arms industry because of broad-brush ethical concerns, ministers have warned.

Andrew Griffith, the City minister, and James Cartlidge, the defence procurement minister, said it is “perverse” for institutions to be shunning or divesting from defence and security companies at a time of war in Europe. 

Writing in the Mail on Sunday and citing Britain’s extensive military aid to Ukraine, the ministers said: “Peace needs defence, and defence needs an industrial base.

“So it is perverse that as war rages on our continental doorstep there is a parallel universe where the defence sector is being shunned.”

They added: “There is a troubling misunderstanding within investor preferences and the defence sector — which includes firms such as BAE Systems, Babcock and Qinetiq — that risks starving the industry of capital at competitive valuations.”

The UK defence sector, they said, had embraced considerations about environmental, social and governance (ESG) issues in a number of ways yet, whether because of “deliberate discrimination or the unintended consequences of a broad-brush approach, defence companies are swept up in ESG investment groupthink”. 

Citing a recent survey, but without going into details, the ministers said some 60 per cent of institutional investors said they had either divested or considered divesting from companies involved in defence or security over ESG concerns.

Yet divesting from these companies undermines Britain’s long-term security and democratic freedoms, they added: “There are not too many ESG outfits in Russia or North Korea.”

The comments come after a meeting between the ministers and executives from BAE, Babcock and Qinetiq last month to discuss the impact of ESG guidelines on the sector. They underline the challenge facing the industry which continues to grapple with concerns from investors and banks over its ESG credentials. 

Before the war, executives had begun to worry that the sector was in danger of becoming “uninvestable” for funds because of ethical questions around defence investment. 

Although the war has changed the view of some investors, industry executives have said more needs to be done to ensure access to finance for investment — both to help keep supplying Ukraine’s fight against Russia as well as to invest in new technologies.

ASD, the European industry trade body, has been calling for a change in the lending policy of the European Investment Bank to encourage private investors. 

“If you want to see this increased production [to help the war effort in Ukraine], then also you need access to private finance,” Jan Pie, ASD secretary-general, told the Financial Times earlier this month.