Defence Industry: Environmental, Social and Governance Considerations

Tuesday 12th September 2023 Written Statements

[The Secretary of State for Defence (Grant Shapps)]

I wish to make a joint statement with HM Treasury, on behalf of His Majesty’s Government.

The Government are clear that the UK’s defence sector has an integral role in supporting the first duty of Government: to promote and protect the United Kingdom’s core national interests—the sovereignty, security and prosperity of the British people. That includes supporting allies and partners and contributing to broader international security.

Nowhere is this clearer than in Ukraine, where we continue to have a leading role in providing our Ukrainian friends with our support and with vital military aid to resist President Putin’s illegal and brutal war.

Our defence industrial base underpins our armed forces, maintains our continuous at-sea nuclear deterrent, and safeguards our critical infrastructure. The private sector is essential to our national security, whether in peacetime or times of emergency. The ongoing maintenance of critical industrial facilities, skills and intellectual property onshore, and the approach we take to sustain these, gives us confidence that we can continue to operate independently, in defence of the country’s interests, without external political influence and protecting the sensitive technologies that underpin our military capability.

Despite this, defence companies are being excluded from access to debt and equity capital, citing environmental, social and governance (ESG) grounds. This not only threatens an important part of the economy that, through MOD expenditure alone, directly and indirectly supports over 200,000 jobs, but fails to recognise that the UK’s defence industry is essential to protecting our way of life. Such divestment also threatens to increase the cost of procurement, diverting taxpayers’ money away from other defence spending and from public services. The industry’s value to us as a key strategic asset is only increasing at a time of global uncertainty.

As outlined in the Defence Command Paper refresh, this Government assert that there is nothing contradictory between the principles within ESG and the defence industry. On the contrary, a strong national defence, including our nuclear deterrent, is a pre-requisite for the freedoms, including social liberties, that we often take for granted, and the aspirations that investors and financial services companies seek to address using ESG considerations.

As stated in the green finance strategy published this spring, the Government believe that continued private investment in the UK defence industry and our NATO allies is essential to protect the UK national interest, the UK economy and broader environmental and social goals.

Moreover, the UK defence sector has reflected ESG considerations in a range of ways. Industry is driving innovation in new technologies to improve sustainability and companies are embedding ESG metrics into their remuneration structures. Additionally, defence companies are exploring how to raise standards across the board, improve access to information and communicate the positive vision of what they are achieving on these subjects.

While investors must always be free to make their own choices, they should do so on the basis of the facts, and those seeking to inform those choices through providing ESG ratings should be clearer on their methodology and more prompt to correct errors when these are pointed out. Defence spending helps prevent war and helps support the British way of life, and those of our NATO allies and partners.

The MOD is showing leadership itself on the environmental and social agenda, including the application of the social value model within its procurement process —we are focused on tackling economic disparities, tackling climate change and promoting equal opportunity. Through the defence suppliers forum, we are working with industry at a strategic level to build sustainability into defence supply chains and tackle greenhouse gas emissions reduction. Crucially, HM Treasury has also published a consultation on a potential regulatory framework for ESG ratings providers with the aim of improving transparency and promoting good conduct in the ESG ratings business. The Government will, with our industrial partners, continue to explore and champion the wider environmental and social benefit of the defence sector and ensure it continues to represent the highest standards of corporate governance. The Economic Secretary to the Treasury, my hon. Friend the Member for Arundel and South Downs (Andrew Griffith), and I will continue to engage with defence companies and the financial sector on access to investment and financial services for industries critical to our national security.

This Government believe that the important values within ESG should not undermine capabilities developed to help us preserve peace and security, without which sustaining those values would not be possible.

[HCWS1014]