Defence Industry: Environmental, Social and Governance Requirements

Wednesday 28th January 2026 Westminster Hall

[ESTHER MCVEY in the Chair]

10:49

[Jack Rankin (Windsor) (Con)]

I beg to move,

That this House has considered the impact of environmental, social and governance requirements on the defence industry.

It is a pleasure to serve under your chairmanship, Ms McVey. I thank the Minister and hon. Members for making time to attend what I hope will be a consequential debate.

Last week, we all heard the Canadian Prime Minister speaking at Davos. He is not quite my flavour of politics, but he spoke a truth: we live in a much more dangerous world and we cannot rely on the international rules-based order to protect us. We are quickly learning an ancient truth that hard power is the most material reality. If we continue to play by imaginary rules while our enemies, and sometimes even our allies, are playing a different game altogether, we are destined to lose, with disastrous consequences for our country and for our children.

Sadly, many of those old assumptions are embedded and entrenched in our financial services industry, universities and politics. In turn, that is having a deeply damaging effect on British defence companies and ultimately on our ability to defend ourselves.

[Adam Dance (Yeovil) (LD)]

Defence firms such as Leonardo in Yeovil are happy to invest in environmental and social products. Leonardo has invested heavily in Yeovil college and entertainment venues and is building its own solar farm—but does the hon. Member agree that, if defence firms are to meet those obligations, the Government need to award contracts such as the new medium-lift helicopter, and that, if not, we will lose the benefits for our community forever?

[Jack Rankin]

The hon. Gentleman makes a powerful point about Leonard, which builds helicopters in his constituency, and I am sure the Minister has heard his pointed remarks.

Parties of both colours have pledged to increase defence spending. This Labour Government have committed to an uplift of 3% in the next Parliament, but when will we see it? What proportion of it will simply make up historical military pensions? How much is actually going to cutting-edge research and development? Currently, only 4% of defence spending goes to small and medium-sized enterprises, which often lead the way on innovation.

What if I told the Minister that there is billions of pounds in funding waiting to be unlocked that would cost the taxpayer nothing, be a huge boost to the economy and improve our national security? It is sitting in the private sector. The importance of private investment was recognised in the strategic defence review, but we are not properly utilising it. Right now, British defence companies are deprived of much of that potential investment because funds of various descriptions prioritise sustainable investment or environmental social governance —ESG—regardless of return. Sometimes those funds actively rule out defence, explicitly or implicitly, in the rules they set.

[Edward Morello (West Dorset) (LD)]

I thank the hon. Member for securing this important debate. I want to correct what I hope was a slip of the tongue when he mentioned parties “of both colours”; he means “of all colours” because I believe the Liberal Democrats have come forward with a proposal for £20 billion-worth of defence bonds in order to properly finance the rapid scale-up in defence manufacturing that we need in the UK.

[Jack Rankin]

I am delighted to correct the record; it is good to see that parties of all colours are backing increased defence spending in a more uncertain world.

The ESG system implies in some sense that defence investment is unethical, but there is nothing less ethical than sending British sons and daughter into battle under-equipped. That is not a blue, red or yellow party political point; I am proud to represent the parts of Slough borough not covered by the Chairman of the Defence Select Committee, the hon. Member for Slough (Mr Dhesi), we have discussed this very point, with which I understand he and his Committee all agree.

Many on the Government side of the House also see the problems of ESG. In March last year, a group of 100 Labour Members of Parliament wrote to banks and fund managers urging them to prioritise defence investment and class British defence investment as ethical. I welcome the presence of the hon. Member for York Outer (Mr Charters) in the Chamber today; I know he has discussed this matter both directly and with the Financial Conduct Authority, and I look forward to his substantive contribution in the debate.

I gently point out, however, that some of the ideology is pushed by some of those on the left who might take woolly views on certain conflicts, specifically Gaza. We should do what we can in this place to challenge that culture, and I suspect that there are many of those naive rules made in this place—perhaps under different geopolitical circumstances—that we should reassess.

To fix this problem, we must first acknowledge just how bad things are in some instances. I am a member of the Scottish Affairs Committee, and a few weeks ago we were able to question Warrick Malcolm of ADS Scotland, which represents Scottish defence businesses, about the chilling effect that progressive authoritarianism has had on the businesses they represent. When he attempted to host a Scottish parliamentary reception to highlight science, technology, engineering and mathematics apprenticeships —broader than just defence—200 protesters shut down the Parliament, allowing no one in or out, and essentially cancelled the whole event. Those people who did squeeze through the melee outside, many of them apprentices in their young 20s, came in in tears because of the abuse they faced.

Sadly, only the Scottish Conservatives supported the reception, while all others steered clear. What message does that send to those in the industry, those hard-working constituents of Members of the Scottish Parliament, when their representatives have no time for them and effectively shun them. Mr Malcolm also talked to the Committee about how a company he represented was vandalised, reducing its capacity by 75%. How will that business remain viable? We can think of careers fairs at universities being shut down, and damaging the attractiveness of defence as a sector to work in; it is a sector that keeps us safe, but it is often not one that employees feel safe to work in.

[Edward Morello]

I thank the hon. Member for humouring me with a second opportunity to intervene. He raised the important point that many defence manufacturers, especially in the South West, provide high-skilled job opportunities for local people. My hon. Friend the Member for Yeovil (Adam Dance) has already mentioned Leonardo in Yeovil, which also employs vast numbers of people in my West Dorset constituency. Those links with local schools and higher education institutions are vital to creating a pathway for people in the south-west, especially those in rural communities, who might not have another avenue into high-skilled labour.

[Jack Rankin]

Of course the hon. Member is right. We have a collective responsibility to advocate for these businesses, as he just did, but as a nation we must also face down this pernicious culture.

To return to the point about financial institutions, the culture we set in Parliament influences them. We do not need to look too far from ourselves to see where the problem is—our own parliamentary pension fund de facto excludes British defence companies by investing in sustainable funds. Its single largest equity holding, the BlackRock low carbon equity fund, fully excludes nuclear weapons, which in reality excludes nearly all defence.

What does our pension fund invest in instead? Tencent Holdings, the parent company of WeChat, which largely considered to be part of China’s surveillance state. That is the very nub of the issue, and illuminates the great irony of the situation. The FCA will unequivocally say that there is no conflict between ESG and defence; while that might sometimes be technically true, the reality often paints a different picture. We just need to follow the money.

The Devon county council pension fund—which I picked because I thought the hon. Member for Plymouth Sutton and Devonport (Luke Pollard) might have been the Minister responding to the debate, and it covers his constituency—states clearly that it prioritises return on investment and does not impose ethical exclusions. However, if one follows its investment down the rabbit hole to its pool provider Brunel Pension Partnership, which handles 93% of the council’s pension funds, we find Paris-aligned pooled funds with carbon thresholds and controversial weapon screens. As we can see, the system is set up against the defence industry. In that system, smaller companies have no chance, because the filtering happens long before capital ever reaches them.

It may well be that pensioners also end up short-changed, given that major British defence companies BAE Systems, Rolls-Royce and Babcock have made returns of 50%, 100% and 146% respectively this past year. This issue extends to our most sensitive areas. While I hope we never need it, I think most sensible people in this country support the backstop of our nuclear deterrent, and ESG potentially threatens that.

We currently have retained EU law that adopts the Paris-aligned benchmarks that exclude nuclear as a controversial weapon. For a fund to be considered Paris-aligned, it will have to meet that benchmark and, by retaining that law, we are encouraging that. Although the Government nominally prioritise Trident, around 1,500 businesses in the supply chain are implicated and will therefore be potentially excluded from finance. As long as we continue to tolerate this madness, we are fighting with one hand behind our back.

We have discussed access to capital, but that is useless for SMEs without a bank account. Defence companies in this country are being debanked. I first came across the issue when meeting a defence SME in my constituency, which had been debanked three times by high street banks. That business makes ammunition for Ukraine. Think of the message that sends to a defence start-up: an entrepreneur just would not go near it. Some of the problem is being driven by the B Corp certification, and I urge the Minister to look at that. “Know your customer” and anti-money laundering operation checks are also a huge issue that needs to be addressed. All that is downstream of the same negative approach to defence that I have described.

This culture has, at least in part, been brought about by successive Government policy, and can also be reversed by it. As a start, the Government should insist that all publicly managed funds should not be investing in funds that explicitly exclude defence. That would be a clear statement of intent about the Government’s expectations, and it would encourage others to do the same. We should also have clearer rules about the exclusion of nuclear so that the SMEs vital to the Trident deterrent are not unfairly cut out.

Much as it pains me to say it, perhaps we could even learn from France, which treats the defence sector as strategically vital. The Chancellor could write to the FCA today and change its remit. Just imagine the change if we were to approach defence as we have approached climate policy over the past 20 years. I am aware that the Government passed legislation in October to permit the FCA to regulate the ESG sector from 2028; although that might seem like a positive step, it could simply entrench the concept legally and say that ESG is sanctified by the Government. If we are serious about rebuilding our defence infrastructure and about national security, we must get serious about the self-harm that ESG culture has done, and is doing, and be prepared to take steps to address it.

[Several hon. Members rose—]

[Esther McVey (in the Chair)]

I remind Members to bob if they wish to be called. We will go to the Front-Bench speakers at about 3.30 pm. I am aware we are expecting a vote, which might come as early as 3.30 pm; I will obviously suspend the sitting when that happens.

14:42

[Mr Luke Charters (York Outer) (Lab)]

It is a pleasure to serve under your chairship, Ms McVey. I genuinely thank the hon. Member for Windsor (Jack Rankin) for securing this debate and for his kind words. We can work cross-party to change the culture across financial services with our voices from this place. May I also say what a pleasure it is to be here with my hon. Friend the Minister? I thank her for all her work on Op Courage and Op Ascend, and on veterans’ homelessness.

I want to be clear: ESG does not need to get in the way of lending to SMEs. It is important to say from the outset that many conflate ESG rules with broader ethical and commercial decisions that firms make; I will perhaps come back to that. I speak from some professional experience: I was acting head of compliance for a fintech where day in, day out, I had to make calls on whether to do business with some of these customers. ESG can, in limited circumstances, be interpreted as blocking lending to SMEs, something that is inconsistent and increasingly at odds with our national security, industrial strategy and economic resilience.

I will touch on what I believe is an artificial distinction between so-called dual-use military technology and single-use military equipment. I come across so many main high street lenders that find this difficult. British high street lenders have every right to put up their hands and say, “We do not want to lend to any company that is involved in chemical weapons or cluster munitions.” They have every right to look at some of the United Nations weapons conventions and say, “We do not want anything to do with them.” However, many lenders are not lending to dual-use military equipment makers.

I will give some examples. I met a fantastic company, Needles and Pins Aerospace, at Defence and Security Equipment International. The company has found banking, insurance and finance very difficult. It produces the insulation that goes on military helicopters—helicopters, by the way, engaged in humanitarian aid missions around the world. The insulation that goes in those helicopters is not an ordnance or a bomb; it is there to protect our British armed forces. It is worth bearing in mind that these lenders and their compliance departments—and I was from that parish—should really get to know the products and services that their customers want to seek finance for.

Another example from my constituency is Edmund Optics, which produces prisms and lenses. There are medical, aerospace, commercial satellite and civilian aircraft applications for those. However, some of those products and services have a dual use—there is also a military use to them. Again, lenders get caught up in a very binary distinction; they should be spending more time understanding the products and services that companies provide.

I want to give another shout-out, this time to 4GD, a data-driven defence training SME with which I have worked extensively, along with ADS, the industry trade body. I saw 4GD’s founder Rob yesterday, and he has told me countless stories about being debanked. His business is about training British armed forces to do what they do better, so that they are more equipped against our adversaries, safer and more resilient. There is nothing more ethical than that. The fact that high street lenders have closed their doors to that commercial opportunity shows the inherent laziness among some people in compliance departments, who refuse to understand the products and services for which their prospective customers are seeking finance.

I am grateful to the hon. Member for Windsor for referencing the work I have done alongside my hon. Friend the Member for Aldershot (Alex Baker). Last year, along with 100 Labour parliamentarians, we wrote to fund and bank managers about ESG. I was really pleased that two things came off the back of that. First, some funds marketed as sustainable said they were going to invest in defence companies, because they found nothing in the rules that inherently disbars sustainable funds from investing in defence—there is nothing in the regulator’s rulebook that does that. That is just a fact, and that fact was ultimately confirmed by my old employer, the Financial Conduct Authority. I am immensely grateful to its chief exec, Nikhil, for his speech last year on defence, and for the FCA’s statement. The FCA has been rock solid and clear that there is no tension between ESG regulatory rules and defence financing—none whatsoever. I say to the financial services practitioners who are listening: please take heed of that.

As I mentioned, there have been some good shifts, but ESG and broader ethical considerations are only part of the structural barriers facing defence firms. Recent work by colleagues across the House, including a report I co-authored, “Rewiring British Defence Financing”, makes the point clearly. That work shows that ESG considerations sit alongside and are outweighed by deeper, more persistent problems across access to capital, commercial lending risk, cash-flow pressures, contracting structures and compliance complexity. Defence SMEs are not failing to secure finance because they are somehow irresponsible actors, but because they operate in an ecosystem defined by long payment cycles, sometimes single dominant customers like the primes, uncertain procurement pipelines and fragmented support across Government.

On that last point, let me turn to the work of my hon. Friend the Minister for Defence Readiness and Industry, who cannot be here today. He has done some phenomenal work setting up the office for small business growth in the Ministry of Defence, which is designed to break down some of the contractual complexities and the fear factor that many defence SMEs face when trying to contract with the MOD. I am happy to confirm to the House that one company in my York Outer constituency, Flyby Technology, will be part of the new OSBG’s shaping cohort, to get into the nitty-gritty of how we can streamline the contracting processes for SMEs, in line with the Government’s mission to increase the direct spend in defence SMEs across the country.

I want to touch on the role of primes when it comes to SMEs in particular. Sometimes the cash-flow challenges created by defence primes are not acceptable. The primes are great employers in this country. I have been to Barrow-in-Furness and seen at first hand how BAE Systems is transforming the fortunes of that town. The primes have a great understanding of their tier 2, 3 and 4 suppliers, but they need to make sure that they pay SMEs on time and quickly.

This is not a mundane point. Were Members to sit down with the chief financial officers of these SMEs and look at their cash flows, it would be clear: a 90-day payment term with a prime, or even a 120-day payment term, increases working capital requirements. The company then has to go out to lenders to try to get financing to cover the shortfall, because the primes are really slow. In turn, that means that when defence SMEs try to get loans for inventory or asset financing, they are often offered worse terms. Primes have a duty to start paying the wonderful SMEs of Britain quickly, because improving their payment terms will create a cyclical effect. Some great primes are better at it. Overall, the result is a system in which highly capable, export-ready firms struggle with the basics—securing bank accounts, insurance and working capital—not at the margins but as a matter of course.

I am worried that some insurers are becoming increasingly hesitant about insuring defence companies because of the risk of political violence. I have worked with Aviva and others on this issue. It is interesting to note that some of the protesters who target the insurers may well themselves have insurance policies with them, or their defined-contribution workplace pensions may well be held in one of these insurer’s accounts. There is a degree of hypocrisy there. Insurers should have every confidence from Members in this place that they are doing right by the defence sector in supporting its growth and development.

Why do all these complexities matter? As the hon. Member for Windsor touched on, they create serious consequences, because if challenges mount up, they could undermine our sovereign defence capability. If British firms cannot raise capital here, what will they do? They may choose to scale abroad or sell to overseas buyers rather than to the British base, or fail altogether. We could become more dependent on foreign supply chains for critical technologies. The Under-Secretary of State for Business and Trade, my hon. Friend the Member for Stockton North (Chris McDonald), has done some really strong work on critical minerals and our sovereign capability in that respect. We have to ensure that there is a sovereign financial base to support our sovereign defence industry.

The challenges we have talked about in procurement, ESG and access to finance hit SMEs the hardest. They do not have big teams of financial experts, and the larger primes can navigate the challenges more easily as they have access to wider capital pools that the smaller firms do not. There is a risk of strategic contradiction, because on the one hand we are asking defence firms to scale, innovate and deliver at pace, but on the other hand we seem to be tolerating a financial system that treats some firms as a reputational liability. That is not sustainable, to borrow a term. The issue is not necessarily ESG principles themselves, but the absence of clarity in how lenders apply their risk tolerance to defence. ESG concerns are only one part of the financing challenge facing defence firms, alongside credit risk, contracting structures and cash flow, but they are the tip of the iceberg. Because these issues are often poorly defined, they create uncertainty that deters lending.

What is missing is a shared understanding across Government, regulators and financial institutions that defence, when conducted lawfully, in line with UN weapons conventions and in support of democratic security, is not a problem but a public good to be enabled. The hon. Member for Windsor touched on the theme of their being nothing more ethical than lending to defence companies that are equipping our Ukrainian friends. Other countries around the world understand that. The US has been much more explicit in aligning its financial system with its national security priorities, particularly in terms of single-use and lethal military equipment.

What needs to change? There is an overwhelming case for a multilateral defence bank—such as the proposed defence, security and resilience bank—that would meet some of the financing challenges. We cannot just look at incremental fixes. I do not want to take up too much time on that, but there is a role for multilateral development finance.

As the report I wrote sets out, private capital alone is not filling the gap, particularly for SMEs in the dual-use space, and where finance does flow, it can be short term. I do not want to get into the details, but we need to make sure that the institutions of the state, be that the NSSIF—the national security strategic investment fund, an arm’s length body that is part of the British Business Bank—or the National Wealth Fund or UK Defence Innovation, sing together and make sure that their finance comes into innovative technologies.

We need to learn the lessons from the Defence Advanced Research Projects Agency in the US. I heard that a significant proportion of US GDP growth comes from the DARPA investments of the 1980s—of course, that agency invented the internet, the smartphone and so many other underlying technologies. Let us learn from the leadership role of DARPA.

[Richard Foord (Honiton and Sidmouth) (LD)]

The hon. Gentleman plainly knows a great deal about this subject and is educating a few of us on it. He talks about the US example; could he also reflect on the European Union regulatory regime around ESG, given that the EU is about to start investing considerably more in defence?

[Mr Charters]

When it comes to our European friends, we have to have cross-border financing. I have met some of the main German commercial lenders that want to come in; likewise, British financial services are investing in success stories such as Rheinmetall and some of the great European defence brands. We have to come together, not just with our European friends, but with Canada and other allied nations around the world, to approach defence financing on a multilateral basis. That is the real lesson.

Let me touch on what our adversaries are doing. They know that they need to innovate quickly when it comes to building up their own financing capabilities. Russia is moving towards more off-balance-sheet lending to a lot of its defence sector. Russian advance manufacturing companies are increasingly gaining access to the Chinese bond market. In general, the Russian war economy is mobilising at pace. Clearly, when it comes to some of our adversaries’ financing mechanisms, they are daring to do things differently—according, of course, to the rule books and ethics of their particular countries. We need to be agile enough to reform our own financing capabilities at pace, too. I am very concerned that we risk forcing British defence SMEs to seek foreign ownership, to offshore their operations or to seek finance overseas simply to survive. That is strategic self-harm when it comes to our sovereign defence capabilities.

You will be pleased to hear, Ms McVey, that I am about to close. In an era of renewed geopolitical competition, the question is not whether the state should play a role in defence finance, but whether we are prepared to act now in order to do so with the seriousness that our security environment demands. I believe that a strong defence financing sector acts as a deterrent to some of our adversaries and means that, where we need to scale industrial capability much quicker, we are ready to do so, if we have a defence financing revolution. This is not a choice between values and security; it is about recognising that, in the world we live in, the two are inseparable.

I hope the Minister will take this opportunity to set out how the Government can encourage lenders to turn on the taps for some of the innovative defence SMEs, no matter whether they are producing prisms, training our special forces or insulating our helicopters. There is nothing more ethical, in our modern world, than supporting the defence SMEs that are maintaining our collective security.

15:00

[Jim Shannon (Strangford) (DUP)]

As always, it is a pleasure to serve under your chairship, Ms McVey. I congratulate the hon. Member for Windsor (Jack Rankin) on setting the scene and the hon. Member for York Outer (Mr Charters) on his excellent contribution; both had plenty of knowledge and information. It is always nice to see the Minister in her place, and I wish her well in her role. I remind her gently of the invitation to come to Beyond the Battlefield in Portavogie in my constituency; maybe she will be able to confirm that shortly—it is nothing to do with this debate, but I wanted to take that opportunity to remind her.

Our armed forces protect our freedoms and deter aggression in a world that has become increasingly volatile. The defence sector employs tens of thousands of people across the United Kingdom of Great Britain and Northern Ireland, while sustaining thousands more in supply chains, and underpins our sovereign capability. In today’s climate, where threats have become much more serious and less predictable than at any time since the end of the cold war, the 2025 strategic defence review highlights the importance of private investment, stating that the sector must make a

“concerted effort to unlock private capital and expertise”,

and outlines the environmental, social and governance role in this sector. I am reminded that the pastor of my church, the Baptist church in Newtownards, said last year that there are 67 wars in the world. It is a world at war, in the truest sense.

From June 2028, ESG ratings providers will be regulated by the Financial Conduct Authority, with new rules on transparency, governance, conflicts of interest and stakeholder engagement. There has been a significant shift towards identifying those factors since Russia’s invasion of Ukraine, which is always in our minds; the pictures and stories from Kyiv in the paper today remind us of the pressure the Ukrainians are under. Morningstar data shows that exposure to aerospace and defence has increased across European funds, including those with ESG labels. That reflects a growing recognition that a strong defence industrial base is essential for security. This Government’s defence industrial strategy sector plan must emphasise the importance of making the defence sector more attractive to private investment, as the Government continue to support and increase it, which I congratulate them and the Minister on. The money they have allocated for Northern Ireland is very welcome, and I appreciate it.

I want to highlight two important examples in Northern Ireland that demonstrate both the challenges and the opportunities. Thales UK, located in east Belfast, is a key player in defence innovation. I have visited Thales on several occasions with my right hon. Friend the Member for Belfast East (Gavin Robinson). I remind the House of the £1.6 billion deal announced in March 2024 for 5,000 lightweight air defence missiles, which are one of the reasons why Ukraine has been so successful in holding her own. Production of those missiles is currently supporting approximately 700 jobs at Thales, while also supporting Ukraine’s defence efforts in the current conflict.

The work done at Thales highlights Northern Ireland’s key position in, and contribution to, the UK defence industry. As I said to one of the Minister’s colleagues in the Chamber, I am very keen to ensure that Northern Ireland’s defence sector can see more of the contracts and opportunities. I know the Government want to do that—I am not saying they are not doing it—but I emphasise that again.

Thales has been proactive in engaging with ESG principles by contributing to the drafting of the UK defence ESG charter in 2024 through ADS Group, integrating ESG criteria into supplier selection and supporting the UK’s low-carbon transition through energy-efficient technologies and cyber-resilience. Far from being restricted by ESG, Thales continues to demonstrate that responsible, ethical practices do strengthen capacity to compete, while attracting local talent and building investor confidence in a sector that is vital to our national security. I am very encouraged by Thales’s introduction of apprenticeships this year, which it is committed to. Thales pays some of the apprentices’ fees, and they get a good wage. That is really constructive and positive, and it comes through the business that the Government here do with Thales and what Thales does as a company.

I am proud to raise another example of Northern Ireland’s contribution to our defence industry: the historic Harland & Wolff shipyard in Belfast, which is one of only three naval shipyards in the UK equipped to carry out major Ministry of Defence work. We are very pleased that it is central to Government policy once again. In 2023, Harland & Wolff became part of the Team Resolute consortium with Navantia UK and BMT, after having been awarded a £1.6 billion contract by the MOD to build three fleet support ships for the Royal Fleet Auxiliary Service.

The impact on the shipyard will be significant. It will include upgrades such as new automated panel lines and advanced robotics, and the technology will move forward to meet the ESG criteria. Harland & Wolff is committed to long-term, ethical production and sustainability while providing jobs in Northern Ireland, and it is really proactive in meeting those criteria. If we want to move forward with a policy, we have to bring companies with us, and that is clearly happening in Northern Ireland. To be fair, I think it is happening across the whole of the United Kingdom. I urge the Minister to commit to issuing joint guidance with the Treasury and the FCA to financial institutions to clarify that responsible investment in UK defence companies, which is vital for national security and jobs in places such as Belfast, can be fully compatible with ESG principles.

I will conclude with this comment. I very much welcome the fact that the Government are prioritising private investment in defence, but we must build on that by providing clearer policy guidance. It is in the national interest of the United Kingdom of Great Britain and Northern Ireland to ensure that our defence industry continues to be supported by Belfast-based firms such as Thales and Harland & Wolff. I ask the Minister to identify and support measures that unlock investment, increase contractual opportunities for businesses in Northern Ireland, in particular, and maintain our defence sovereignty.

15:06

[Luke Akehurst (North Durham) (Lab)]

It is a pleasure to serve under your chairship, Ms McVey. I thank the hon. Member for Windsor (Jack Rankin) for securing this important debate and introducing it so eloquently. It is an honour to follow the hon. Member for Strangford (Jim Shannon), who always makes important contributions to debates about defence matters, and my hon. Friend the Member for York Outer (Mr Charters), whose knowledge of defence financing is extremely granular.

This debate is a chance to make it clear that the highest form of corporate social responsibility is for a company to be involved in the defence of the country. To me, it is quite bizarre that people and institutions would put the provision of proper equipment for our armed forces or our allies who are fighting against fascism in Ukraine in the same category for divestment as tobacco, pornography, modern slavery or forced labour. That just seems perverse.

Investment in the task of keeping the British people safe from the growing threats posed by hostile actors is not just legitimate, but a moral necessity. In the context of the strategic defence review, which correctly identifies the urgency and significance of unlocking private capital to drive the investment in defence that we need to meet the growing and complex threats facing the country, the impact of environmental, social and governance ratings on securing finance for defence must be looked at more closely than ever before.

We must not lose sight of the fact that the whole point of having the strongest possible defence capability is to act as a deterrent. We are not aiming to use these weapons; we are using them to try to prevent a war from happening. I am sure that I do not need to point out to Members the ethical, environmental and social harm of conflict. I know they are acutely aware that the best way to avoid war is to prepare for one. Only by projecting strength and showing our enemies that we are ready to fight can we deter the worst-case outcome.

As the hon. Member for Windsor said, back in March 2025 I and 100 other Labour MPs signed a letter, which was co-ordinated by my hon. Friends the Members for York Outer and for Aldershot (Alex Baker)—she is disappointed not to be able to join us today—calling on Britain’s bank and fund managers to do away with rules that class investment in defence, notably in supporting Ukraine’s fight against Russian aggression, as somehow unethical. As the letter stated,

“There can be no more ethical investment than giving the Ukrainian people every ounce of support that can be mustered by their allies.”

That same standard, of course, applies to our own defence —one of the core tasks our constituents send us to this place to take care of. Ten months on from that letter, today’s debate is a prime opportunity for the Minister to update us on what consideration the Government have given to this issue, especially with regard to what I hope is the imminent defence investment plan.

As a Member of Parliament for a constituency in north-east England, I am particularly excited by the opportunities that the Government’s increase in defence spending can create for my constituents in North Durham and across the region. Less than a third of the Ministry of Defence’s spending with British industry is directed to London and the south-east, so defence can be an engine for growth in the regions.

I share the Labour Government’s ambition for defence spending to act as a key engine for economic growth, especially in more deprived, post-industrial parts of the country, which have borne the brunt of decades of deindustrialisation, including my North Durham constituency. It is worth noting that, during the cold war, there were tens of thousands of jobs in the defence sector in north-east England. There was Swan Hunter shipyard, and there was a very large factory, Vickers, producing land systems—it is still a very good factory, under Pearson Engineering, but a lot smaller. People remember the industrial contribution the north-east was making to defence.

Unfortunately, the north-east now has the lowest per capita defence spend of any region or nation, according to the MOD’s own figures. I would go so far as to argue that there are significant ethical and social benefits from the kind of defence investment that would bring jobs to our area, upskill my constituents and provide them with the opportunity to make a good living in exercising the patriotic duty of pitching in by equipping the people who are defending our country. Can the Minister update us on the impact of ESG ratings on directing capital towards areas such as the north-east, where there is a heritage of industrial jobs and skills, and where investment would bolster the Government’s agenda of tackling regional inequality and bringing opportunity back to places such as County Durham?

When they go wrong, ESG ratings can act as a drag on crucial investment in defence, but that does not mean we should write off the importance of ethical considerations when financing the defence of our nation. It is right that, even when investing in defence capabilities, we do all we can to operate in line with, for instance, the planet’s environmental limits. Indeed, many defence companies have already changed in line with ESG considerations. Through the UK defence ESG charter, the defence sector in the UK has collaborated to drive ambition and action on sustainability. The charter promotes greater transparency, dedicating firms to working together to meet commitments focused on climate transition, clean technology, societal impact, and governance and ethics. The charter was shortlisted for the 2025 Trade Association Forum awards in the ESG initiative of the year category.

To give one example—it is actually the company that the hon. Member for Strangford talked so eloquently about, because it has a site so near to his constituency—Thales in the UK sources all its electricity from renewables, and ESG forms at least 15% of its supplier selection criteria. The platinum medal from EcoVadis places Thales among the top 1% of all firms in its rankings. Clearly, the moral grandstanding of backing away from defence investment on ethical grounds does nothing to improve the ethical footprint of the defence industry. Instead, we ought to be working with industry to incentivise better practices, such as those I have just outlined. With that in mind, will the Minister elaborate on the positive role that ESG can play for defence companies? How can we ensure that the industry takes the greatest possible consideration of its impact on the planet, without getting in the way of its No. 1 priority, defending our nation?

Thankfully, ESG standards are becoming less and less of a roadblock to defence spending, with ESG-labelled investment in defence rising steadily since 2021. However, broader structural issues continue to act as a barrier to unlocking growth in defence. SMEs, as my hon. Friend the Member for York Outer mentioned, face particular challenges in accessing finance and banking, because of banks’ own compliance policies rather than ESG ratings. Will the Minister expand on how the Government can address those challenges, and encourage banks to adjust their compliance policies to better ensure that defence SMEs can access the capital they need to get off the ground?

We must never lose sight of the moral case for the defence of our nation, which I know matters so much to my constituents in North Durham, many of whose family members are veterans or serving in the armed forces; indeed, one in 10 of the households in my constituency is in that position. We must do all we can to secure the capital that our defence industry needs to rearm the country at pace and stand up to the growing threats we face. I look forward to hearing from the Minister about how we can ensure that ESG requirements do not act as a barrier to this moral and practical necessity, and I hope to continue working with Members across the House to drive investment in the British defence industry, especially in the north-east of England.

15:14

[Katie Lam (Weald of Kent) (Con)]

It is a pleasure, Ms McVey, to serve with you in the Chair this afternoon, and I thank my hon. Friend the Member for Windsor (Jack Rankin) for securing this important debate.

It is often said—including by my hon. Friend in his opening speech today—that we are living in an ever more dangerous world. In fact, it is the most dangerous world in my lifetime or that of my hon. Friend, although he never tires of reminding me that he is a year younger than me.

The Government’s own 2025 strategic defence review stated:

“The threats we now face are more serious and less predictable than at any time since the Cold War”.

Clearly, therefore, we should do everything in our power to ensure that our armed forces are well-staffed and well-equipped. The defence of the realm is the first duty of any Government. However, for that to mean anything, defending our nation must take priority over other aims. Yet far too often we have seen our armed forces and the companies that supply them being forced to put social value requirements ahead of their existential duty to keep us safe.

As crazy as that sounds, it is no exaggeration or hypothetical concern. In 2022, the Royal Air Force paused recruitment of white men to try to raise its proportion of women and ethnic minorities. The RAF quite literally and explicitly would rather have hired nobody to defend this country from the air than hire a white guy. That is lunacy.

Cruel or unpleasant behaviour towards women is repulsive and clearly should have no place in our armed forces, their suppliers, or indeed any workforce. Where women want to jobs that have historically been filled by men—where they can do them; many roles in the armed forces have physical requirements that cannot be compromised—there should be no barrier to them doing so. I applaud those women, as I applaud the men who are willing to risk their lives for our freedom. However, to abandon our defence of the skies in the name of diversity quotas is completely and utterly mad. The RAF has since apologised for its decision, but I mention it today because it is crucial in the context of this debate. It shows the climate in which British companies that want to supply equipment to our military must operate.

As has already been said by many hon. Members, in order to trade in the UK, defence companies must comply with the general ESG regulations set out under the Companies Act 2006. If they wish to sell their equipment to the British Government, they must comply with the rules set out under the Ministry of Defence’s climate change and sustainability strategic approach. That includes the publication of a carbon reduction plan and compliance with rules designed to minimise environmental impact. If the firms wish to be publicly listed, they must wrangle the Financial Conduct Authority’s rules on ESG ratings.

Generally, defence companies are not considered to be an ethical investment, meaning that they are often scored badly for the purposes of ESG ratings, as my hon. Friend the Member for Windsor and several other hon. Members have already said. Given that the FCA has consistently pushed funds to focus on ESG-compliant investments, that is clearly a significant cause for concern.

Just last year, some of the country’s largest investors, including the National Employment Savings Trust, which is the workplace pension scheme set up by the Government, reiterated their determination to refuse to invest in defence stocks, in the name of “ethics”. What exactly is ethical about shunning those companies that dedicate themselves to equipping our defence forces and protecting our freedom? As the FCA moves to standardise rules for ESG ratings providers, we still have no clear indication about how it intends to treat defence companies for the purpose of ESG ratings. In pursuit of secondary aims, we are making life more difficult for British defence companies and, in turn, for the armed forces that we expect to keep us safe.

One way or another, our armed forces will need to procure the equipment they need to do their jobs. While ESG requirements continue to stifle the British defence industry, we are forced into choosing one of two options, neither of them good. We could pay over the odds for equipment produced in this country. The compliance costs created by ESG rules and the disincentives to private investment created by the ESG ratings regime could force many defence firms to put up their prices, meaning higher costs for the British taxpayer, should we wish to rely on military equipment produced here. This situation also makes our kit more expensive and therefore less desirable to our allies; having fewer customers will drive up prices even further. Alternatively, we will have to rely on equipment from overseas, leaving us dependent on other countries.

Neither of those outcomes is acceptable. The status quo is bad for our armed forces and bad for the British taxpayer. The answer, of course, is to reject this dichotomy entirely. We should unleash the natural strength of the British defence industry, including by scrapping those ESG requirements that make life more difficult for British defence firms.

It would be remiss of me not to mention that, as heavy manufacturing firms, British defence companies are also likely to be disproportionately damaged by the energy policy that the Government are pursuing, which has produced the highest industrial energy prices in the developed world.

We know that our defence industry has the capability to be one of the best, if not the best, in the world. As recently as 2013, this country’s defence industry was second in the world in the export of military equipment when measured by total value of new orders. Today, partly thanks to the growth of the regulatory burden on defence firms, we have fallen to seventh. That is bad for our own military, which must now choose between importing its equipment from abroad or paying over the odds for equipment produced in this country, and it is bad for our interests overseas. After all, militaries around the world will always need new equipment. I would much rather they were able to buy British than from competitors in Russia or China.

It is clearly true that the problems the British defence industry now faces did not begin under this Government, or even under the previous Government. But it does, of course, now fall to this Government to address them. I hope the Minister will be able to tell us whether the Government have any plans to exempt defence firms from existing ESG regulations or to make changes to those regulations for all companies. I hope she will also be able to offer us some insight into whether the Government have engaged with the FCA about the classification of defence firms for ESG purposes ahead of the consultation deadline on 31 March.

15:21

[Helen Maguire (Epsom and Ewell) (LD)]

It is an absolute pleasure to serve under your chairship, Ms McVey. I thank the hon. Member for Windsor (Jack Rankin) for securing this important debate.

Private investment is the lifeblood of our defence industry—now more than ever. In an era defined by geopolitical volatility, from Russia’s brutal invasion of Ukraine to the unpredictable actions of global leaders, defence preparedness must be at the heart of the Government’s agenda. The landscape is shifting. World leaders are recalibrating their strategies, and the private sector is doing the same. ESG-focused funds are increasingly recognising the strategic and ethical imperative of investing in defence. Since Russia’s full-scale invasion in 2022, exposure of ESG European equity funds to aerospace and defence has surged by a factor of 2.7. That is not an anomaly; it is a trend.

There is often confusion from some stakeholders who claim that ESG rules exclude defence companies from sustainable finance, but ESG disclosure and labelling rules do not require defence exclusion. Let me be clear: ESG rules do not exclude defence companies. The confusion is misplaced. Many sustainable funds invest in defence, and those that exclude it typically do so for voluntary ethical reasons or because of reputational concerns, not because ESG rules mandate it. I am pleased that the Government have been clear that they agree there is nothing contradictory between ESG considerations and defence. This position is shared by the Liberal Democrats, who see the industry’s broader structural problems, such as political uncertainty over defence procurement, long production cycles, export controls and delays in Government payments, as the much bigger issue.

Having met many defence companies, including SMEs, I have heard how they are lacking long-term certainty, making it difficult to invest in capacity, innovation and workforce development. Take Labour’s recent indecision on the new medium helicopter contract, which my hon. Friend the Member for Yeovil (Adam Dance) recently alluded to. Delays risk jobs and investment. Meanwhile, the defence investment plan remains unseen. Will the Minister confirm when the plan will be published?

Defence companies, especially SMEs, need certainty. They need to invest in capacity, innovation and their workforce. The war in Ukraine has shown what is possible when industry and Government work together at pace. Yet our current system is failing them. Will the Minister commit to replacing rigid defence reviews with a flexible, continuous assessment of security threats? As part of this, the Government must look to improve collaboration with European and NATO partners to develop new technologies, equipment and training, including via the northern group. Will the Minister therefore give us an update on the UK’s access to the Security Action for Europe fund? Prioritising interoperability with NATO allies and other strategic partners means that we can support each other during peace and war; in times like these, that is paramount.

SMEs are the backbone of the UK defence industry, providing flexibility, innovation and supporting high quality jobs across the UK. However, they face unique challenges that limit their potential to contribute fully to defence capability and UK prosperity. They receive just 5% of the procurement budget, with 42% of contracts going to the same 10 suppliers. That is not just unfair; it is short-sighted, so will the Minister update us on the defence office for small business growth?

We know that the previous Conservative Government bungled defence procurement in our country, overseeing budget overruns and insufficient equipment supplies. It is time for a concerted effort to get behind the defence industry. That means no more delays to vital contracts, and timely and relevant investment plans. That is why the Liberal Democrats will partner with industry to provide the confidence to boost private sector investment in research and development, training and facilities, securing key skills and employment opportunities and ensuring that the economic benefits build the prosperity of UK regions.

To incentivise defence spending, we have also shared our plans for war bonds. Members of the public could loan the Government money in the form of a bond that would run over a period of two to three years and pay out the same interest as standard Government bonds. The bonds could raise up to £20 billion for the military, and would give the public a chance to support our defence patriotically, so has the Minister reviewed those proposals and will she set up a meeting to discuss it in more detail?

The world is changing rapidly. We can no longer rely on old certainties, and thanks to Donald Trump, we can no longer depend on our closest allies. The UK’s defence industry must come first. Will the Minister stand with defence businesses of all sizes and private investors and commit to making the UK a global leader in defence, innovation and resilience?

15:26

[David Reed (Exmouth and Exeter East) (Con)]

It is a pleasure to serve under your chairship, Ms McVey. We all know the world is becoming more dangerous. We talk about it all the time. We have these conversations in Parliament. We have them at home with constituents, family and friends, but we all know that words and conversations alone will not protect us.

We need to make the hard choices now to ensure that the state fulfils its most fundamental role: protecting its citizens and its borders. Failing to do so puts the rest of our country at risk: our NHS, our education system, our markets and our way of life. That is why this debate is so important. I am genuinely thankful to my hon. Friend the Member for Windsor (Jack Rankin) for securing it, because it goes to the heart of a culture that must change rapidly if we are to stay safe. We must ensure that those countries that pose a threat to our democratic way of life are not inadvertently enabled by structures we have imposed on ourselves.

There have been a number of fantastic contributions. My hon. Friend set the tone for the whole debate. The world is becoming more dangerous, and the system of international law that we have lived under, as well as the processes that underpin it, are disappearing rapidly, and we need to change to keep pace. He talked about challenging the culture and the need for the House to push that cultural change, so that money is flowing into the defence industry. He made a number of points about how ESG is being used in different ways, from university campuses to pushing back defence industries from job fairs. I think we can all agree that that needs to change.

The hon. Member for York Outer (Mr Charters) has deep knowledge of this issue. He has worked at the coalface of the industry to understand how these contracts are formulated across Government and industry. He talked about the distinction between funding for things that go bang—hard, single-effect capabilities—and for dual-use technologies. I thank him and the hon. Member for Aldershot (Alex Baker) for their work on the “Rewiring British Defence Financing” report. I look forward to hearing what the Minister has to say about how that is impacting the work on the defence investment plan.

The hon. Member for Strangford (Jim Shannon) adds to defence discussions in the House on almost a daily basis. He spoke again about Northern Ireland and about companies, such as Thales and Harland & Wolff, which are at the heart of shipbuilding and aerospace defence. He spoke about how ESG is being used by those companies to ensure that they stay on Government frameworks. I would love to speak to him afterwards to understand how those policies may be impacting their business outputs.

The hon. Member for North Durham (Luke Akehurst) spoke powerfully about deterrence and about investing in defence now to keep us all safe. I think we can all agree that no one wants to go back to war. A number of the Members who have spoken in this debate are veterans who have experienced war, and they know that we do not want that for our country. To ensure deterrence, we must allocate capital to put ourselves in a strong position for the future.

My hon. Friend the Member for Weald of Kent (Katie Lam) talked specifically about how ESG was used in the RAF to socially engineer certain outcomes, for which the RAF apologised. It should always be a meritocracy of the best man or woman for that job and nothing else should get in the way. She went into the nuance of the national legislation, the FCA and the red tape wrapped around companies.

Lastly, I completely agree with the points raised by the Lib Dem spokesperson, the hon. Member for Epsom and Ewell (Helen Maguire), about the need for the Government to give defence companies a firm contractual push so they know what is coming down the track. I would like to hear more about the bonds idea, which was raised in the Chamber two nights ago on Second Reading of the Armed Forces Bill. When we asked where the money would come from and what budgets would need to be cut to repay two to three-year bonds, we did not get a clear answer, so I would like to hear more.

Organisations that have a role to play in our collective national defence must recognise that investing in defence is both patriotic and necessary. Anything that prevents them from doing so should be stripped away. I truly believe that that cultural shift must begin in earnest in this place.

The three pillars of ESG examine how a company treats the environment, manages relationships with stakeholders, and governs itself. At first glance, that all makes sense. It is easy to see why those pillars send a signal to the markets about an organisation’s priorities, but here is the problem: the framework has evolved in a way that increasingly treats national defence as a negative, somehow signalling a bad actor. Defence-focused investments have been lumped together with industries such as tobacco and gambling. The hon. Member for North Durham added pornography to the list. How did we reach a position where we have forgotten that spending on defence and providing deterrence is the foundation on which everything else we value in society rests?

I often speak about this with my dad, who was born in 1942 in Plymouth, a city that was bombed heavily during the blitz. Some of his earliest memories are of being under the stairs listening to the drone of Luftwaffe bombs overhead. His generation was the last in this country to experience borders and national security as fragile and uncertain, but as was raised a few times today, if we fast forward a few generations, for young people, the idea that they might have to fight for what they love is an abstract concept at best. We have lost our emotive memory of war, which puts us in a precarious position.

I also fear that we draw the wrong lessons from history. When we mobilised during the first and second world wars, we did so with an existing industrial base. Factories could be repurposed quickly and critical resources were within reach. Closer to home, the lessons from covid further muddied the water. A debilitating pandemic was high on the national risk register, yet it was not given the seriousness it deserved. What followed was denial followed by urgency. Companies such as Dyson switched to producing ventilators and we scrambled internationally to source protective equipment for our NHS. In great British fashion, we muddled through.

With the risk of international conflict rising by the day, however, I do not want us to have to muddle through again. We all have a responsibility to ensure that the state fulfils its primary duty: keeping our countrymen and women safe. Everything else is secondary. I do not want to wait until we are punched in the face before we react. That is why this debate matters. It is about the practical steps, such as where the money for increased defence comes from and how we cut the red tape that is holding back our defence industry.

We also need to look hard at how we better align the capital allocation industry with defence. The Chief of the Defence Staff warned of the £28 billion gap between our current resources and our defence ambitions, so we must get serious. Concerns have been raised that only a small fraction of recent defence contracts have gone towards weapons and armour, fuelling fear in the defence industry of an effective procurement freeze at precisely the moment we should be accelerating rearmament.

The private sector and private capital are not a silver bullet, but they are a major part of the answer. The Government are reported to be exploring public-private partnerships, but those will not progress while markets continue to view defence as unethical or constrained by ESG stipulations. That must change through Government contracts removing such prohibitive clauses and the Government being seen as a reliable partner where returns can be guaranteed.

That means having defence spending that matches the rhetoric, and contracts awarded at the scale required to meet the growing threats. It is encouraging to see parts of the defence investment space already working to shift that culture. The UK Private Capital trade association has had a defence working group for nearly a year to educate the capital allocation industry about what national deterrence, both defensive and offensive, really means—a point raised by the hon. Member for York Outer—and why investment must include hard capabilities that keep us safe, not just dual-use technologies at the edges.

We must also be honest about the barriers that remain. Societal pressures and perceptions around defence, particularly under the S pillar of ESG, have led to real reticence. Many high-street financing providers maintain restrictive policies towards defence firms, often requiring higher levels of due diligence. Increasingly, investment funds are developing ESG policies that exclude defence under blanket terminology around weapons or nuclear and extend deep into the supply chain, rather than acting in a targeted way. These unregulated exclusions are inhibiting defence investment at exactly the wrong time.

I acknowledge that work is in progress to address that. As referred to by the hon. Members for York Outer, for Strangford and for North Durham, industry has developed initiatives such as the UK defence ESG charter and the HM Treasury and ADS trade body joint taskforce. However, I believe that more parliamentary support is needed to help investors understand the realities of the sector and encourage responsible investments. The Government must provide clear demand signals for both industry and finance. The outcomes of the defence industrial strategy and the strategic defence review will be crucial in setting the tone for where, what and how the UK intends to spend with the defence sector.

I do not want to fall into the trap of opposing the Government for opposition’s sake. I want Labour to do well. I want the Defence Ministers to do well. If they do well, the UK does well, and we should all be on team UK. That is why I offer the following comments constructively. I hope the Minister receives them in that spirit.

My party has done some hard work over the last 18 months. We have set out clear plans to boost defence spending through a sovereign defence fund of up to £50 billion, funded by reallocating existing expenditure currently directed towards costly environmental projects. That would enable the procurement of drones and new technologies at a far greater pace and scale, transforming the capability and lethality of the British armed forces. Crucially, it would help to deliver the industrial capacity we need here at home.

To enable that ramp-up in domestic production, the sovereign defence fund would mobilise billions in public and private funding to overhaul the defence industrial base. There are practical steps we can take: taking stakes in UK defence start-ups, investing in dual-use companies, and building resilient supply chains to reduce reliance on hostile states such as China.

This is a fully funded plan based on repurposing existing Government expenditure towards this national priority. It comprises three elements. First, £6 billion would be reallocated from the research and development budget in the Department for Science, Innovation and Technology to the Ministry of Defence. As we all know, and has been touched on today, defence innovation has spillover benefits to other sectors, from communications to transport. Secondly, £11 billion would be ringfenced from the National Wealth Fund to become the national defence and resilience bank. That funding is currently allocated to a number of non-vital eco-projects; the remainder would stay focused on national resilience such as water and transport. Thirdly, approximately £33 billion would be mobilised from private finance through the same model already used by the National Wealth Fund, unlocking billions more in investment.

We all know that other countries are doing this. Countries such as the United States and Germany are already allocating huge funds for defence and bolstering their domestic manufacturing and technological bases. We must do the same, because if we do not we will become prey to those who do not value our way of life. The Government must act with urgency, match words with action and help to drive the cultural shift that will allow our country to be properly defended. That is why this debate matters so much. I thank my hon. Friend the Member for Windsor again for securing it. I look forward to working with colleagues across the House to progress this agenda.

15:39

[The Minister for Veterans and People (Louise Sandher-Jones)]

It is a pleasure to see you in the Chair, Ms McVey. I will take a minute to put on record my deep sadness about the death of Captain Philip Gilbert Muldowney on Sunday. My thoughts, and the thoughts of everyone here, are with his loved ones.

I am grateful to the hon. Member for Windsor (Jack Rankin) for initiating this important debate, and for highlighting the unduly negative light in which defence can sadly sometimes be viewed in investment and academic circles. All hon. Members here, including me, care deeply about our society, environment and good governance, but I welcome this opportunity to set out why defence, rather than being incompatible with those values, underpins all three. I am sure that if we asked families in Ukraine whether greater spending on defence and deterrence over the last decade would have had a positive or negative impact on their society, environment and governance, we would get only one answer.

I will speak quickly to some of the points raised in this debate. The hon. Member for Windsor rightly spoke about the importance of more money for SMEs in the defence industry. The Government have a target of spending £7.5 billion with SMEs by 2027-28, which is a 50% increase. As somebody who used to work for an SME that had some interest in defence customers, I know how difficult a challenge it can be in that space, without any unfair negative attention being paid to the industry we were in.

The hon. Member for Yeovil (Adam Dance) spoke about the importance of support for Leonardo and for helicopters, and I will make sure that his comments are passed to the Minister for Defence Readiness and Industry. The Secretary of State met representatives from Leonardo last week, and I know that the Minister will continue the dialogue with them and the hon. Member. I will also ensure that the comments of the hon. Member for West Dorset (Edward Morello) are passed to the Minister.

I thank my hon. Friend the Member for York Outer (Mr Charters) for his excellent work on this issue, and for working with other hon. Members across parties, including my hon. Friend the Member for Aldershot (Alex Baker), to highlight how important it is that we understand how defence is underpinning environmental, social and governance issues, rather than acting in opposition to them. He rightly highlighted the positive impact SMEs have in his constituency, and particularly noted Needles and Pins Aerospace and Edmund Optics. It can be difficult for the average person to understand exactly what we mean when we talk about defence SMEs, and he highlighted their work in areas as niche as helicopter insulation or lens manufacturing, and in training support.

My hon. Friend the Member for York Outer also rightly spoke about debanking. Whether it is access to funds, access to banking or access to any other financial services, it is important that we understand exactly the issues that SMEs may be facing. He was also right to highlight the particular challenges for SMEs that come from the long payment cycles of primes. Again, having worked in an SME, I know how frustrating it can be when an SME has a product that the customer wants and that the SME can provide, but what would be a good deal is prevented by a long payment cycle and difficulty with funding.

I will no doubt speak to the hon. Member for Strangford (Jim Shannon) after the debate about his point on Beyond the Battlefield. He noted the proud history of Northern Ireland and Belfast in the defence industry. I am delighted that the lightweight multirole missiles contract has further secured that industry, and I know that the future continues to be bright. He also highlighted the huge importance of the defence industry for apprenticeships and having those highly skilled, technical pipelines where young people leave education and start on fantastic careers where they learn skills and earn a decent wage. Apprenticeships are hugely important in his and my constituency, and in the constituencies of many hon. Members here, so he is right to note them.

Let me turn now to the points raised by my hon. Friend the Member for North Durham (Luke Akehurst) on the impact on the planet. As he knows, the MOD and our partners are absolutely committed to safeguarding our national security first and foremost. However, we must also recognise the impact of addressing climate-related risks, and when we look at the intersection of climate-related risks and defence, we know they are inextricably linked.

We must also look at reducing environmental impacts, and I know I am not the only Member of this House who has fond memories of doing their bit by picking up brass from training areas. However, we must make sure that the MOD is also doing work across the board to ensure we understand and consider its impact on the wider environment. My hon. Friend will know that our financial reporting is aligned with the Task Force on Climate-Related Financial Disclosures frameworks, ensuring that we understand climate risks to both the MOD and our supply chain, which are ultimately not acting in opposition, but are inextricably linked.

Let me turn to my hon. Friend’s point on compliance policies. We are absolutely committed to mobilising private investors to take a fresh look at defence. That comes alongside the certainty of our own record long-term uplift in defence spending. That is particularly crucial for SMEs looking to scale up their concepts, ideas and prototypes. As with any bank-to-SME relationship, we recognise that there will be commercial considerations and compliance processes, which will include ESG and no doubt other regulatory considerations. None the less, we welcome the Financial Conduct Authority’s statement, which confirmed that there are no rules in its regulations that prevent

“investment or finance for defence companies.”

The Defence Office for Small Business Growth—which the Minister for Defence Readiness and Industry launched this week in Scotland—the £2.5 billion spending target by 2027-28 and the defence innovation unit all mean that, as well as proactively engaging the investor community to further build market confidence, we will collaborate on investment opportunities.

Turning to the points made by the hon. Member for Weald of Kent (Katie Lam), I note her underlining of the importance of defence for the nation. It is not always helpful to conflate ESG and diversity and inclusion. None the less, I thank her for raising the previous Government’s record of failure on recruitment and for highlighting their poor record on defence exports and their failure to improve our sovereign energy capability.

I thank the hon. and gallant Member for Epsom and Ewell (Helen Maguire) for her strong statement that ESG and defence are not contradictory. As she rightly notes, there are challenges for the defence industry, and having stability is hugely important. She also raised the importance of continuously assessing threats, so I think she will note my comments about the need to balance long-term stability with assessing threats—there would be a balance and trade-offs between the two. Along with other hon. Members, she also mentioned the defence investment plan, and I can assure her that we are working flat out to deliver it as soon as possible.

Let me turn now to the hon. and gallant Member for Exmouth and Exeter East (David Reed). His commitment to this topic is plain to see, and he is evidently passionate about it. He rightly noted the importance of allocations of capital, and that we must act equitably in this space and underline the important role the defence industry plays in the security of this nation and the prosperity of the individual nations within it. He also rightly noted the importance of defence industries being able to go into academic spaces such as universities. We of course note the right to peaceful protest, but companies should none the less be allowed to go into universities and show the huge opportunities they can offer those who seek careers in defence. Finally, he rightly noted that we should not equivocate between dual-use military technologies and core defence capabilities. He was right to say that weapons and ammunition are just as important as helicopter insulation, and we should not equivocate between the two. I note his call for us not to do that. I will make sure that his wider suggestions are passed to my colleague the Minister for Defence Readiness and Industry for full consideration.

The Government believe that investing in defence, and the deterrent effect that that buys, provides the stable foundation on which everything else in this nation depends, from our economy to our ability to go about our daily lives. Across this House, we must never stop reminding people that defence investment prevents wars, and for only a tiny fraction of the cost of fighting one.

Therefore, in our more dangerous and unpredictable world, as we implement the largest increase in defence spending since the cold war, and move towards a footing of warfighting readiness, we must dismantle all barriers that might hold back defence investment. That is why we have come into government determined to forge a much closer partnership between industry, innovators and investors, and to work together to find ways to unlock that investment.

Although we acknowledge the debate raging about the extent to which ESG considerations can be a brake on investment in defence, it is important to note the FCA’s statement on how its own rules do not prohibit financing investment in the defence sector. However, we have to note the anecdotal evidence that negative perceptions and a lack of understanding of the rules are acting as a drag on defence investment by individuals and financial institutions.

As part of our consultation on our defence industrial strategy, we heard from smaller defence suppliers about their difficulties with access to finance, whether in opening a bank account or securing a loan. That is wrong; it harms British jobs, British firms and our national security.

We have been loud and clear about the valuable economic and social contribution of the defence sector. Indeed, my colleague the Minister for Defence Readiness and Industry is frequently heard to use the phrase “engine for growth” as he talks about the importance of defence investment. I have already spoken about the work he did on Monday in launching the Defence Office for Small Business Growth, which will work with small and medium-sized businesses to address the barriers hampering them at the time when we need them most.

Through the strategic defence review and the defence industrial strategy, we have been clear about the societal value of defence investment. We have been very clear—I say this on the record and as clearly as possible—that defence is an ethical investment. We have illustrated how defence investment has repeatedly led to huge leaps forward in dual-use technologies, from advanced materials and computing to clean energy technologies. In a high-tech age of artificial intelligence and quantum computing, such dual-use opportunities are magnified, as in turn is the potential for defence investment to stimulate jobs and economic growth.

When we discuss ESG, it is important that we do not completely dismiss ethical concerns. We have only to look at Russia’s bombardment of Ukrainian cities to understand that there can be a basis for legitimate concern about how weapons are used. This Government believe that the answer to such concerns in relation to UK-made equipment lies in robust export controls and international law, not in harming our own security by starving our defence industrial base of the investment it needs.

We have set in train an evidence-led approach to dismantling the barriers we have talked about. We have a much closer partnership with the financial sector, and are working together to find new ways to unlock investment. The Defence Secretary convened a first-of-its-kind meeting with venture capitalists last April. We brought together venture capitalists, private equity and other key financial services at our defence investment summit in September, and that group of experts is also helping to inform our defence finance and investment strategy. That will reflect the work we are doing with the FCA and the Pensions Regulator to explore the impact of all regulations on defence financing and investment.

We will also set out steps we can take to tackle the perception, which some hold, that defence is an unethical investment. Many of us have spoken about the importance of the pipeline of skilled and talented innovators, so we must make sure we address negative perceptions of defence in the education sector. To do so, we have committed to establishing the defence universities alliance, which will bring together a network of universities, the MOD, armed forces and the wider sector to promote defence careers and support defence research.

For too long, the defence sector has had an unearned and unfair reputation that is likely to have harmed defence investment. This Government are determined to change that narrative, and we are working hard to do so. Yes, war is brutal, but the best way of avoiding it is to invest in deterrence, which means investing in defence. In doing so, we fuel the virtuous circle of investment, jobs and growth, benefiting communities right across the country and making ourselves more secure at home and stronger abroad—something that I know everybody in this room can get behind.

15:53

[Jack Rankin]

I thank all hon. Members from across the Chamber for their considered contributions, and particularly the hon. Members for York Outer (Mr Charters), for Strangford (Jim Shannon) and for North Durham (Luke Akehurst), as well as my hon. Friend the Member for Weald of Kent (Katie Lam).

Speakers have emphasised slightly different things, but we all support a safe and confident Britain and understand that the first responsibility of His Majesty’s Britannic Government is the defence of the realm. Investment in defence is patriotic, it is necessary and it helps to make war less likely.

I thank the Minister for her comments. Given the increasingly dangerous world we live in, we should take action today.

Question put and agreed to.

Resolved,

That this House has considered the impact of environmental, social and governance requirements on the defence industry.

15:54

Sitting suspended.