How ‘ethical' banking is putting British defence firms at risk

Telegraph

6 hours ago

Should British troops ever find themselves fighting World War Three, they may be glad of the time they spent with a bad-tempered robot capable of shouting at them in Russian, Arabic and Chinese. The SimStriker is an AI-powered android used to train infantry in everything from full-scale combat to peacekeeping. It can play the role of enemy soldier, traumatised civilian or hostile villager – and like a moody Alexa, it can interact and answer back. If provoked, it can even open fire, Terminator-style, with a pellet gun hidden in its abdomen.
'The idea is to blend the physical and virtual worlds,' says James Crowley, one of two former Royal Marines who set up 4GD, the aerospace tech firm behind SimStriker.
'Often soldiers won't have much idea of the environment they're going into, and this allows us to create a tiered system of behaviours – the robot can respond passively or aggressively, depending on a soldier's actions.'
Founded in 2016, 4GD is exactly the kind of next-generation defence firm Britain needs to keep its military fit for the 21st century. There is one foe, however, that even SimStriker can't simulate – a bank manager.
Despite helping to defend the realm, UK defence firms often struggle to obtain loans or insurance. Some have been denied bank accounts altogether, or 'debanked' (the process by which accounts are abruptly closed at a bank's discretion) after existing ones were shut down.
The trend is largely driven by banks' reputational concerns – particularly the belief that defence companies fall foul of the financial sector's so-called 'environment, sustainability and governance' (ESG) standards. The squeamishness persists even though many firms, such as 4GD, manufacture only non-lethal products – and despite growing recognition, including from the Prime Minister, that Britain must rearm at pace.
'There has been a reticence to see defence as a moral and ethical investment that needs to be supported, although with war now on Europe's doorstep, that has changed significantly,' Crowley says.
'If we want to support our nation as a democratic institution, then we need a robust defence industry.'
As he points out, the Russia-Ukraine war has pushed defence spending back up the political agenda. This month's Strategic Defence Review (SDR) pledged to raise spending from 2.5 to 3 per cent of GDP, while Sir Keir Starmer has spoken of the need for 'war fighting readiness' and a longer-term goal of increasing defence spending to 5 per cent by 2035.
Many banks, however, still group arms firms alongside tobacco giants, rapacious oil majors, and Reform Party leader Nigel Farage – who was infamously 'debanked' by NatWest-owned Coutts in 2023.
That, certainly, is the impression given by a recent report from the trade body ADS (Aerospace, Defence, Security and Space), which represents more than 1,500 small defence firms. Nearly three quarters of members who took part in an ADS survey said they had struggled to access basic banking services. Roughly half also reported difficulties securing loans and investment, with the trade body warning that the financial barriers are so severe some companies 'risk going under' as a result.
One firm's owner, who asked to remain anonymous, told the survey: 'The financial sector has completely decimated the defence industry, they'd rather have an account with the local car wash than a firearms dealer or somebody in the defence industry.'
The owner's wish for anonymity is hardly surprising. Many defence businesses, especially smaller ones, are wary of criticising the banking sector, which can terminate accounts without giving a reason. Firms and banks are also targeted by anti-arms trade activists, galvanised by the Israel-Gaza conflict.
Last summer, campaigners from Palestine Action vandalised around 20 Barclays branches across the UK, demanding the bank divest from 'Israel's weapons trade'. (The group is now set to be proscribed as a terrorist organisation after its activists breached security at an air base to damage two RAF planes last week.)
4GD is one of the few defence firms willing to speak out, and Crowley's co-founder, Afghanistan veteran Rob Taylor, doesn't pull his punches. The firm, he says, has effectively given up on attending investment meetings in the UK, having been turned down point-blank as soon as the word 'defence' was mentioned. And while 4GD has never been 'debanked', it remains an occupational hazard in the defence trade.
'We are aware of other companies that have been debanked once they have been discovered to be defence firms,' Crowley says. 'It's infrequent, but frequent enough that it's not a surprise when it happens.'
One problem is that UK banks are not currently required to explain why they shut down accounts – and if challenged, they can easily obfuscate, citing business reasons rather than reputational concerns. Last year, however, a Treasury select committee on access to banking was told that Santander and Lloyds alone closed 300 accounts belonging to 'public administration and defence' companies. While no reasons were given for the closures, the committee's report stated that ESG criteria should not be used to blacklist firms 'engaged in perfectly legal defence activities'.
The term 'ESG' was first coined 20 years ago during a United Nations-led push to promote global corporate social responsibility, but it gained real traction after the 2008 financial meltdown, when scandal-ridden banks sought to signal they were cleaning up their act. Once a relatively niche concept, 'ethical investment' quickly went mainstream. Banks and financial firms also faced growing social media pressure if they failed to comply.
One UK company that noticed the shift was Devon-based engineers SC Group, which manufactures all-terrain vehicles for the British military. Its products include the Jackal armoured patrol vehicle, featuring special V-shaped hulls designed to deflect improvised explosive device (IED) blasts, and credited with saving countless British soldiers' lives in Afghanistan.
That seemed to count for little when CEO Nicholas Ames found himself seeking finance five years ago. 'We were surprised at how restricted the market had become, with lots of people saying we don't do defence, it's against our ethics committee,' Ames says.
'We were flatly told by HSBC, for example, that they didn't do defence. That was when I began thinking: 'This is a systemic issue for the UK government, if it wants a strong UK defence industry'.'
To their credit, he says SC Group's regular bankers, NatWest, 'has always stuck with us'. But other businesses sometimes shunned the firm, he added, including suppliers of certain parts and website and IT contractors. Defence firms also find it hard to qualify for awards promoting socially responsible companies, such as the 'B Corp' certification.
The ESG equivalent of a Michelin Star, B Corp certificates recognise firms that 'balance profits with people and planet'. Certificate holders include The Body Shop and Charlie Bigham's food. However, according to B Corp guidance, defence firms 'are controversial because their services could be misused in ways that may harm others'.
Phil Doye is chief executive of the IT procurement firm Boxxe, which counts defence sector clients among others and applied for B Corp certification in 2021. However, despite passing a rigorous audit, the firm decided not to proceed after being told it would have to post a public statement explaining why it was willing to work with defence companies.
'We were keen to obtain B Corp certification, as we agree with the broad idea of socially responsible business, but the public statement might have seemed to our defence clients like we were embarrassed to do business with them,' Doye says.
'You could say that the B Corp definition of defence as 'controversial' is itself somewhat controversial.'
Defence industry sources say the Russia-Ukraine war has brought a much-needed reality check, with the Labour government shedding any knee-jerk opposition to the arms industry. Two Labour MPs, Luke Charters and Alex Baker, have led a campaign to help defence firms access finance. The Government also wants the Ministry of Defence – the main client for many defence products – to provide suppliers with clearer long-term signals about their spending plans. The UK Sustainable Investment and Finance Association (UKSIF), which represents investors, insists that this, rather than over-fussy ESG criteria, is often what makes defence firms unattractive investment prospects.
There is still a long way to go, though. While some banks may lift their blanket bans on defence products, they may still baulk at the more lethal end of the industry – the stuff that, as Crowley puts it, might 'make a bank manager wince'.
One of Britain's most successful arms firms is firearms manufacturer Accuracy International, founded 50 years ago by ex-Olympic sharpshooters. In what is perhaps the ultimate product endorsement, its sniper rifles are used by both British and American special forces. But as favoured tools of professional assassins, they are unlikely ever to receive B Corp certification.
Yet sniper rifles are as essential to modern warfare as any other military equipment. So too are cluster munitions and anti-personnel mines, which have proved crucial in Ukraine's defence – though Britain neither makes nor possesses them anymore, having signed global treaties banning their use. A time may come when British firms will have to produce these weapons again – and may once more be seeking bank managers' support.
Certain Labour politicians, meanwhile, continue to act as if nothing has changed. In the wake of the Israel-Gaza conflict, four Labour-run London councils – Tower Hamlets, Waltham Forest, Islington and Lewisham – have divested staff pension schemes from arms trade firms. In 2023, investment giant Aviva was also criticised by ministers after announcing it would sell off arms shares as part of 'a baseline exclusion policy'. Aviva later backtracked, blaming a badly worded memo.
However, any swing of mood back in favour of defence firms has convinced Ames that despite all the recent talk about ESG, bankers' only real language is money. 'Now that defence is a hot topic again, suddenly you sense that the financial community has got over their ethics, as they see there's money flowing,' he says. 'That makes it almost worse in a way – I had no idea they were quite so shallow.'