Defence firms held back by UK ethical banking standards, industry says
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British banks should abandon outdated ethical standards and increase lending to domestic defence manufacturers in a "patriotic" effort to ensure the UK can meet its security needs, defence suppliers have told Sky News.
The defence industry has long complained that environment, sustainability and governance (ESG) standards, intended to guide business impact on society, have prevented small and medium-sized companies (SMEs) raising finance.
With the government promising to increase defence spending to 2.5% of GDP, and the chancellor keen that SMEs in the sector should contribute increased growth, the industry believes ESG rules could hold British companies back.
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Lizzie Jones of Supacat, which manufactures military vehicles used by special forces and infantry, told Sky News: "We have absolutely felt the disinterest from banks to invest in the defence industry, which has been really hard to deal with over the last few years.
"We're hoping that the tide is beginning to change, and that actually some of the patriotic feelings that we need the defence industry, particularly right now, will help persuade the banks that investing in defence industries is good for UK growth."
The call for support from the defence industry comes as European military chiefs meet in London to discuss operational aspects of a proposed peacekeeping force in Ukraine.
Donald Trump's return to the White House, and his demand that European NATO partners scale up defence and lead any security guarantees for Ukraine, has forced a re-examination of defence priorities.
Rachel Reeves has sought to link increased spending to her growth agenda, and defence will form part of the industrial strategy due later this year.
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Earlier this month a group of Labour MPs, and members of the defence select committee, called on banks to end "anti-defence" ESG guidelines in light of the US retreat from European security, and the need to increase support for Ukraine.
Improved access to finance is one of several demands from defence suppliers large and small, as the industry prepares for increased demand.
Certainty of contracts, a reduction in Ministry of Defence red tape, and access to cheap energy, skilled workers and critical minerals are all also required if the UK is to enjoy "sovereign capability" - the ability to build and deploy its own equipment, weapons and systems.
The call for a re-examination of ethical standards was echoed by one of the largest defence suppliers, Leonardo UK, the British arm of an Italian-listed multinational that manufactures helicopters and electronic warfare technology.
Chief executive Clive Higgins told Sky News: "The ESG agenda was really impacting small to medium enterprises where no banking was effectively taking place, and individuals couldn't go get a bank account because they were in the defence sector.
"We've seen a real, really proactive response from the government over the last 12 months. I think we're starting to see a shift in the tragic events going on in Ukraine, which helps people recognise the importance of defence at home, because that ensures we can enjoy the freedoms that you and I take for granted each day."
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The UK Sustainable Finance Association, which represents a number of major investors and pension funds, rejected the argument that the defence industry is "underinvested".
Chief executive James Alexander said: "The notion that defence firms' low valuations and struggles for finance is because of 'ESG' criteria is nonsense.
"The UK's 'ESG' (or sustainable finance) regulations at no point prohibit defence investments. While some values-based (or 'ethical') investors may opt against investing in defence companies, they represent a small proportion of the financial system.
"Many financial institutions, including mainstream, sustainable investors, do invest in defence. Most critical to defence companies' prospects, though, is government spending, as highlighted by the rise in several defence stocks this year, as the UK and European allies have understandably announced increases in defence spending."
The Financial Conduct Authority said last month that its ESG reporting rules contain nothing "that prevents investment or finance for defence companies", implying that divesting from or avoiding defence is a choice for institutions and their customers.
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