Defence Sector Banking Services: Environmental, Social and Governance Rules

Monday 26th October 2026 Lords Chamber

Question

14:41

Asked by

[Lord Sharpe of Epsom]

To ask His Majesty’s Government what progress they have made in reforming environmental, social and governance rules to ensure that they are not used by financial institutions to deny banking services, including loans, to the UK defence sector.

[The Parliamentary Secretary, HM Treasury (Lord Pitt-Watson) (Lab)]

My Lords, I thank the noble Lord, Lord Sharpe, for his interest in this issue. It is timely because, in response to his and other work, today the FCA has confirmed there should be no sustainability requirements and no FCA regulatory barrier preventing banks and other financial institutions supporting the defence sector. I have the publication with me; it requires good practice from financial firms. I hope that goes some way to addressing the concerns the noble Lord has been raising.

[Lord Sharpe of Epsom (Con)]

I thank the Minister for that Answer, and I am very grateful to him for it, because it is encouraging. The reason I am asking this Question again—the second time in 18 months—is that I was recently contacted by two ex-Army officers who have developed a novel counter-drone technology. They had secured a £700,000 grant from Innovate UK but were in danger of losing that grant because they had nowhere to put it. The banks said that they could not open an account on the ex-Army officers’ behalf “because of the nature” of their business. Can the Minister press home the importance of this new FCA report directly to the banks? Perhaps he could invite them to the Treasury and explain that defending the nation is not only profoundly ethical but a moral imperative.

[Lord Pitt-Watson (Lab)]

I am in entire agreement with the noble Lord, Lord Sharpe, on this. To be clear, no legitimate company should be excluded from financial services solely because it operates in the defence sector. I can confirm that, as a first step, the FCA will be writing to all financial firms today to make that expectation absolutely clear. Again, I thank him and the many other people from all political parties who have been campaigning on this important issue for some time.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, I chair the Industry and Regulators Committee. We are looking at defence at the moment, and we have heard from small defence companies with this problem. I ask two things. The first is to make sure that the FCA enforce the guidance, which it does not do in the other area I deal with, as noble Lords know, of politically exposed persons. The second is that financial services be sympathetic to the sort of cases referred to. These are often new companies, so they will not have a long trading arm, and therefore help must be flexible.

[Lord Pitt-Watson (Lab)]

Again, I am in total agreement on this. The FCA did this, and we encouraged it to do so, for precisely for that reason. In particular, we want to make sure that new start-up companies and small and medium-sized enterprises in the defence sector have access to the financial services they need to carry out their business and help protect the nation. I thoroughly agree with the comments made by the noble Baroness.

[Baroness Kramer (LD)]

My Lords, I asked that this action be taken in an amendment to the financial services Bill, so I am very pleased that we are going to get more vigour from the FCA. I join others in insisting that that vigour be sustained. There was a second, equally important issue: the public procurement process for small defence businesses, including the Government’s failure to protect SMEs’ intellectual property. Given that these small businesses are vital for innovation in the defence sector, as other noble Lords have said, will the Government look seriously at this issue, which is also undermining development in this area?

[Lord Pitt-Watson (Lab)]

The Government are sympathetic and are putting their money where their mouth is. For example, the British Business Bank’s growth guarantee scheme, which is specifically focused on defence and other SMEs, provides £3.5 billion a year. One example is Kraken Technology, in marine defence, which aims not to be the sole lender but to crowd in private finance as well. The national security strategic investment fund, for start-up companies like the one we were talking about earlier, will invest £100 million by 2029-30. So, again, we have a full consensus and considerable action is taking place on the issues being raised by this Question today.

[Lord Robertson of Port Ellen (Lab)]

My Lords, I refer to my entry in the register of interests. There are still financial institutions in this country which are resistant to the idea of investing in defence. I ask the Minister to encourage them to read last year’s strategic defence review, in which they will see the good reasons we have for investing in defence, especially given the danger this country faces. I also point out that the word “defence” refers to the defence of this country. This country is in danger, and a lot of these companies need the money for investment for the future.

[Lord Pitt-Watson (Lab)]

Again, I am in desperate agreement with the noble Lord. The first communication they are going to receive is from their regulator, the Financial Conduct Authority—I have it here—which is going to be clear that there are no sustainability requirements that prevent companies serving defence firms. When they serve defence firms, they should consider the risks associated with them, but they should do that proportionately and consistently across all the companies they are funding. If this FCA action does not work, I am sure I will have another round of Questions in a few months’ time.

[Baroness Neville-Rolfe (Con)]

My Lords, like others, I have been appalled by this long-standing problem with finding bank accounts, especially for the small and innovative defence companies that we really need at the current time. On 8 June, the FCA said:

“Our sustainability rules do not prevent investment in or finance for defence companies”.


I am not sure what today’s welcome announcement changes, because banks continue to have their own ESG-style exclusions—and I know ESG is an area in which the Minister is an expert. So, can he undertake to sort that out as well?

[Lord Pitt-Watson (Lab)]

I think that is also covered in the FCA letter. One can overdo how significant ESG disclosures and regimes have been in preventing investment in defence. At one time, that was an issue, and there has been some concern among supporters of allowing ESG investment, along with some reform. My co-author, Stephen Davis, of Harvard Law School, is among those who has campaigned on this. I note that RUSI agrees that ESG disclosure regimes generally do not prevent investment in defence, and the push now being given by the FCA is the right next step for us to take to ensure that defence companies are treated in exactly the same way as any other companies seeking finance.

[Baroness Deech (CB)]

Will the Minister confirm that the sentiments he has expressed apply equally to any anti-Israel prejudice that is preventing proper investment in defence, and that the Government should lead the way by not putting any obstacles in the way of the supply of and co-operation with Israeli intelligence in our defence mechanisms?

[Lord Pitt-Watson (Lab)]

The FCA is saying—and I agree with it—that there are no rules that exclude financial services from a company solely because it operates in the defence sector. If an individual company wishes to take that into account, it should do so proportionately and consistently, and those rules should be clear to those who are approaching it. If any noble Lords would like me to send them a copy of what the FCA is asking to be done, drop me an email and I will make sure my office sends it to them. This is a significant step forward on what has been an important issue, and I again thank the Members of this House who have been raising it. This is the right response, and a solid one.

[Lord Fox (LD)]

My Lords, I am glad the Minister mentioned the RUSI report, because I attended the discussion on it. He is exactly right that it found that ESG constraints in banks was not a specific issue, but it is also suggested that perceived public affairs and public relations issues in the management of those banks was driving these behaviours. There is more than simply a regulatory issue here; there is a cultural one. Can the Minister explain how we might go about addressing that?

[Lord Pitt-Watson (Lab)]

Please ask for a copy of the FCA report, because it specifically addresses the issue that banks must be responsible for making sure that they are consistent and proportionate and that defence is not a reason, ipso facto, for refusing funding for companies. I would be happy to send the noble Lord that report.