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UK Defence Secretary Argues that Defence Spending is an Ethical Investment

A joint statement from the defence secretary and The Treasury addresses the defence sector’s exclusion from environmental, social, and governance ratings.

UK Defence Secretary Grant Shapps has emphasized that funding defence companies should be considered an ethical investment because military spending “helps prevent war.” 

In a written ministerial statement released yesterday, jointly issued with HM Treasury, Mr. Shapps highlighted the critical role of the UK’s defence sector in safeguarding the nation’s sovereignty, security, and prosperity. 

His statement responds to the exclusion of defence companies from “environmental, social, and governance” (ESG) ratings, which limits their access to sustainable investors.

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The statement emphasizes the importance of supporting allies, contributing to international security, and providing military aid to Ukraine amidst its ongoing conflict.

It also labels the exclusion of the defence industry from ESG ratings as an “error” and highlights that it “threatens an important part of the economy.”  

Mr. Shapps writes, “The Government is clear that the UK’s defence sector plays an integral role in promoting and protecting our core national interests, including sovereignty, security, and prosperity. This includes supporting allies and partners and contributing to broader international security.”

This statement follows discussions between ministers and defence company leaders about whether the demand for ethical investing was hindering the industry’s capital-raising efforts. Defence companies had previously suggested that ESG requirements reduced investor interest, although earlier this year, BAE Systems’ CEO, Charles Woodburn, noted that this became less of an issue after Russia’s invasion of Ukraine, coinciding with a 75 percent increase in BAE’s share price.

The statement highlights the pivotal role of the defence industrial base, which supports the Armed Forces, maintains the continuous-at-sea nuclear deterrent, and safeguards critical infrastructure. It also stresses the importance of the private sector in national security, particularly during emergencies. 

In addition, the communiqué points out the importance of maintaining essential industrial facilities, skills, and intellectual property onshore, which is considered vital for ensuring independence in defence operations and safeguarding sensitive military technologies.

Subsequently, Mr. Shapps expresses concerns about the exclusion of defence companies from accessing debt and equity capital on ESG grounds. 

Mr. Shapps says, “Such divestment not only threatens the economy, which supports over 200,000 jobs through Ministry of Defence expenditure, but it also jeopardizes our way of life and increases the cost of procurement, diverting taxpayers’ money from other defence spending and public services.”

Laying out the case for the compatibility of ESG principles with the defence industry, Mr. Shapps asserts that a robust national defence is essential for preserving social liberties and meeting the aspirations of investors and financial services companies focused on ESG considerations.

Mr. Shapps points out that the UK’s defence sector has already embraced ESG considerations, with the industry innovating in sustainability and integrating ESG metrics into remuneration structures. Additionally, defence companies are working to improve standards, access to information, and communication of their achievements in these areas.

The joint statement urges investors to make informed choices based on facts and calls for greater clarity and prompt error correction by organizations providing ESG ratings. It highlights the role of defence spending in preventing conflict and supporting the British way of life, as well as the interests of NATO allies and partners.

Mr. Shapps commends the Ministry of Defence’s leadership in environmental and social initiatives, including the application of the Social Value Model in procurement and efforts to address economic disparities, climate change, and equal opportunity. Collaboration with industry through the Defence Suppliers Forum is also aimed at promoting sustainability in defence supply chains and reducing greenhouse gas emissions.

Within the statement, it is announced that HM Treasury has initiated a consultation on a potential regulatory framework for ESG ratings providers, aiming to enhance transparency and promote good conduct in the ESG ratings business.

Mr. Shapps affirms the government’s commitment to championing the environmental and social benefits of the defence sector and maintaining high standards of corporate governance. He pledges ongoing engagement with defence companies and the financial sector to ensure access to investment and financial services for industries vital to national security.

Pledging that the government will continue to explore and promote the broader environmental and social benefits of the defence sector, the defence secretary advises that he will collaborate with Treasury Minister Andrew Griffith to engage with defence companies and the financial sector to ensure access to investment and financial services for industries critical to national security.

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