Highlights

• RUSI report shows ESG standards are not a barrier to investment in the UK defence industry.
• Structural issues, including long procurement cycles, limit access to capital.
• Labour MPs’ concerns about ESG restrictions are misplaced, as exclusions are based on ethical choices, not regulations.

The RUSI report finds that ESG investment rules are not blocking funding for the UK defence industry.

The study, written by Dr Linus Terhorst, examines why defence firms in Britain and Europe have difficulty attracting investors while governments increase military spending in response to tensions with Russia.

According to the paper, the main obstacles come from structural issues. Umpteen times, defence projects involve long development cycles and complex government procurement processes. These factors limit the sector’s ability to appeal to investors.

Read More: Avon Pension Fund to Survey Members on Defence Investments

In addition, many small and medium-sized enterprises (SMEs) lack the resources to meet international banking standards that allow access to foreign financial markets. These requirements are separate from ESG policies.

The report clarifies that ESG disclosure and labelling regimes do not stop financial institutions from investing in defence. Some sustainable funds choose to exclude the sector for ethical or reputational reasons, but this is a voluntary decision by individual fund managers.

ESG regulations themselves do not require such exclusions.

This finding contrasts with recent calls by over 100 Labour MPs and peers, who asked UK banks and investors to loosen ESG rules they said were wrongly classifying defence as unethical.

The report says the public debate has been misdirected because the true barriers lie in banking practices and industry structure, not in ESG regulation.

UKSIF chief executive James Alexander welcomed the report’s conclusions, noting that emerging defence firms face financial difficulties, but these are tied to procurement processes and banking requirements.

Also Read: Do Defence Stocks Have a Place in Sustainable Investing?

Alex Baker MP, who co-authored the Labour letter, also welcomed the analysis, stating that the war in Ukraine shows the need for a well-financed defence sector and that attention should move to removing financial barriers for SMEs and their supply chains.

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