Defence Industry: Environmental, Social and Governance Requirements

David Reed Excerpts

Wednesday 28th January 2026 Westminster Hall

[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.