Defence Industry: Environmental, Social and Governance Requirements

Katie Lam Excerpts

Wednesday 28th January 2026 Westminster Hall

[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.