Defence Industry: Environmental, Social and Governance Requirements

Richard Foord Excerpts

Wednesday 28th January 2026 Westminster Hall

[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.