## National Security vs. Green Finance: Is ESG Undermining UK Defence?
A growing chorus of Members of Parliament has voiced profound apprehension that current Environmental, Social, and Governance (ESG) guidelines are inadvertently creating significant hurdles for UK defence companies seeking financial backing. They warn that such restrictions risk eroding the nation’s industrial resilience and potentially compromising its security in an increasingly volatile global landscape.
### The Westminster Alarm Bell: A Shift in Strategic Imperatives
This critical issue ignited a fervent discussion in Westminster Hall on January 28th, spearheaded by Conservative MP Jack Rankin. The debate meticulously scrutinised the tangible impact of stringent ESG requirements on the vital defence sector.
Kicking off the proceedings, Rankin asserted with conviction that the global strategic environment has undergone a fundamental transformation. He underscored that a complacent reliance on existing international norms is no longer tenable in a world fraught with escalating dangers. “We live in a much more dangerous world and we cannot rely on the international rules-based order to protect us,” he declared, adding a stark truth: “Hard power is the most material reality.”
Rankin sounded a powerful warning: while potential adversaries are rapidly mobilising their economic might, the UK and its allies face the perilous prospect of self-inflicted wounds, stifling their own defence industries through cumbersome financial and regulatory barriers. A recurring theme amongst several MPs was the pronounced difficulty defence companies encounter when trying to secure private investment, particularly as many funds and banks apply ESG criteria that often, explicitly or implicitly, exclude activities related to defence.
### Voices from Across the Aisle: Challenging the ESG Paradigm
#### Unlocking Capital and Questioning Ethics
Liberal Democrat MP Edward Morello championed an innovative solution: the creation of £20 billion in dedicated “defence bonds” to inject much-needed capital into rapidly expanding the UK’s defence manufacturing capacity. He contended that a substantial pool of private capital exists, yet remains frustratingly untapped.
“There is billions of pounds in funding waiting to be unlocked that would cost the taxpayer nothing,” Morello stated emphatically. He lamented that defence firms are being starved of investment because funds often prioritise ESG mandates “explicitly or implicitly,” sometimes even at the expense of robust financial returns. Morello further argued that while ESG frameworks are designed to promote responsible investment, their practical consequence is often to actively deter defence activities altogether.
Morello’s critique sharpened as he observed, “The ESG system implies in some sense that defence investment is unethical.” He then delivered a powerful counter-argument: “But there is nothing less ethical than sending British sons and daughters into battle under-equipped.” The long-term ramifications for regional defence employers and the integrity of the UK’s industrial base were also significant points of concern.
#### Government Support: The Cornerstone of Capability
Echoing these anxieties, fellow Liberal Democrat MP Adam Dance spotlighted Leonardo’s crucial helicopter facility in Yeovil. He acknowledged the company’s substantial investment in environmental and social initiatives, from education partnerships to renewable energy solutions. However, Dance then posed a critical question: can defence firms realistically be expected to meet these demanding ESG obligations without unwavering government support through consistent contract awards?
“If defence firms are to meet those obligations, the Government need to award contracts such as the new medium-lift helicopter,” Dance urged. He cautioned that a failure to do so could lead to the irreversible loss of vital industrial capability and significant local economic benefits.
#### Demystifying ESG for Defence SMEs
Labour MP Luke Charters contributed a crucial perspective, asserting that ESG frameworks themselves should not inherently obstruct lending, especially for the smaller and medium-sized enterprises (SMEs) that form the backbone of the defence supply chain. Drawing on his professional background in financial compliance, Charters highlighted that ESG rules are frequently misinterpreted or misapplied by financial institutions.
“ESG does not need to get in the way of lending to SMEs,” he assured MPs, urging caution against conflating legitimate ESG requirements with broader, often outdated, ethical or commercial biases held by firms. He warned that long-standing, often erroneous, assumptions surrounding defence investment have become deeply entrenched across various sectors. “Sadly, many of those old assumptions are embedded and entrenched in our financial services industry, universities and politics,” Charters observed, concluding that this pervasive mindset is having a “deeply damaging effect on British defence companies and ultimately on our ability to defend ourselves.”
### A Global Mirror: Learning from Adversaries and the Path Forward
The debate also ventured into international comparisons, with MPs noting the divergent approaches adversaries are adopting towards defence financing. Charters pointed out that Russia, for example, is increasingly leveraging alternative funding mechanisms, including off-balance-sheet lending and access to overseas capital markets, as part of its aggressive war economy mobilisation.
Speakers from across the political spectrum converged on a singular, urgent message: the UK must fundamentally re-evaluate how its defence sector is positioned within existing financial and regulatory frameworks. This reconsideration is particularly critical as the government strives to accelerate rearmament and significantly expand domestic manufacturing capabilities. This impassioned discussion follows similar concerns raised in recent Defence Committee evidence sessions, where ministers themselves acknowledged the tangible risk that escalating inflation and constrained industrial capacity could severely diminish the impact of rising defence budgets, unless procurement and financing mechanisms undergo radical reform.