Defence Industry: Environmental, Social and Governance Requirements
Luke Charters Excerpts(1 week ago)
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Mr Luke Charters (York Outer) (Lab)
It is a pleasure to serve under your chairship, Ms McVey. I genuinely thank the hon. Member for Windsor (Jack Rankin) for securing this debate and for his kind words. We can work cross-party to change the culture across financial services with our voices from this place. May I also say what a pleasure it is to be here with my hon. Friend the Minister? I thank her for all her work on Op Courage and Op Ascend, and on veterans’ homelessness.
I want to be clear: ESG does not need to get in the way of lending to SMEs. It is important to say from the outset that many conflate ESG rules with broader ethical and commercial decisions that firms make; I will perhaps come back to that. I speak from some professional experience: I was acting head of compliance for a fintech where day in, day out, I had to make calls on whether to do business with some of these customers. ESG can, in limited circumstances, be interpreted as blocking lending to SMEs, something that is inconsistent and increasingly at odds with our national security, industrial strategy and economic resilience.
I will touch on what I believe is an artificial distinction between so-called dual-use military technology and single-use military equipment. I come across so many main high street lenders that find this difficult. British high street lenders have every right to put up their hands and say, “We do not want to lend to any company that is involved in chemical weapons or cluster munitions.” They have every right to look at some of the United Nations weapons conventions and say, “We do not want anything to do with them.” However, many lenders are not lending to dual-use military equipment makers.
I will give some examples. I met a fantastic company, Needles and Pins Aerospace, at Defence and Security Equipment International. The company has found banking, insurance and finance very difficult. It produces the insulation that goes on military helicopters—helicopters, by the way, engaged in humanitarian aid missions around the world. The insulation that goes in those helicopters is not an ordnance or a bomb; it is there to protect our British armed forces. It is worth bearing in mind that these lenders and their compliance departments—and I was from that parish—should really get to know the products and services that their customers want to seek finance for.
Another example from my constituency is Edmund Optics, which produces prisms and lenses. There are medical, aerospace, commercial satellite and civilian aircraft applications for those. However, some of those products and services have a dual use—there is also a military use to them. Again, lenders get caught up in a very binary distinction; they should be spending more time understanding the products and services that companies provide.
I want to give another shout-out, this time to 4GD, a data-driven defence training SME with which I have worked extensively, along with ADS, the industry trade body. I saw 4GD’s founder Rob yesterday, and he has told me countless stories about being debanked. His business is about training British armed forces to do what they do better, so that they are more equipped against our adversaries, safer and more resilient. There is nothing more ethical than that. The fact that high street lenders have closed their doors to that commercial opportunity shows the inherent laziness among some people in compliance departments, who refuse to understand the products and services for which their prospective customers are seeking finance.
I am grateful to the hon. Member for Windsor for referencing the work I have done alongside my hon. Friend the Member for Aldershot (Alex Baker). Last year, along with 100 Labour parliamentarians, we wrote to fund and bank managers about ESG. I was really pleased that two things came off the back of that. First, some funds marketed as sustainable said they were going to invest in defence companies, because they found nothing in the rules that inherently disbars sustainable funds from investing in defence—there is nothing in the regulator’s rulebook that does that. That is just a fact, and that fact was ultimately confirmed by my old employer, the Financial Conduct Authority. I am immensely grateful to its chief exec, Nikhil, for his speech last year on defence, and for the FCA’s statement. The FCA has been rock solid and clear that there is no tension between ESG regulatory rules and defence financing—none whatsoever. I say to the financial services practitioners who are listening: please take heed of that.
As I mentioned, there have been some good shifts, but ESG and broader ethical considerations are only part of the structural barriers facing defence firms. Recent work by colleagues across the House, including a report I co-authored, “Rewiring British Defence Financing”, makes the point clearly. That work shows that ESG considerations sit alongside and are outweighed by deeper, more persistent problems across access to capital, commercial lending risk, cash-flow pressures, contracting structures and compliance complexity. Defence SMEs are not failing to secure finance because they are somehow irresponsible actors, but because they operate in an ecosystem defined by long payment cycles, sometimes single dominant customers like the primes, uncertain procurement pipelines and fragmented support across Government.
On that last point, let me turn to the work of my hon. Friend the Minister for Defence Readiness and Industry, who cannot be here today. He has done some phenomenal work setting up the office for small business growth in the Ministry of Defence, which is designed to break down some of the contractual complexities and the fear factor that many defence SMEs face when trying to contract with the MOD. I am happy to confirm to the House that one company in my York Outer constituency, Flyby Technology, will be part of the new OSBG’s shaping cohort, to get into the nitty-gritty of how we can streamline the contracting processes for SMEs, in line with the Government’s mission to increase the direct spend in defence SMEs across the country.
I want to touch on the role of primes when it comes to SMEs in particular. Sometimes the cash-flow challenges created by defence primes are not acceptable. The primes are great employers in this country. I have been to Barrow-in-Furness and seen at first hand how BAE Systems is transforming the fortunes of that town. The primes have a great understanding of their tier 2, 3 and 4 suppliers, but they need to make sure that they pay SMEs on time and quickly.
This is not a mundane point. Were Members to sit down with the chief financial officers of these SMEs and look at their cash flows, it would be clear: a 90-day payment term with a prime, or even a 120-day payment term, increases working capital requirements. The company then has to go out to lenders to try to get financing to cover the shortfall, because the primes are really slow. In turn, that means that when defence SMEs try to get loans for inventory or asset financing, they are often offered worse terms. Primes have a duty to start paying the wonderful SMEs of Britain quickly, because improving their payment terms will create a cyclical effect. Some great primes are better at it. Overall, the result is a system in which highly capable, export-ready firms struggle with the basics—securing bank accounts, insurance and working capital—not at the margins but as a matter of course.
I am worried that some insurers are becoming increasingly hesitant about insuring defence companies because of the risk of political violence. I have worked with Aviva and others on this issue. It is interesting to note that some of the protesters who target the insurers may well themselves have insurance policies with them, or their defined-contribution workplace pensions may well be held in one of these insurer’s accounts. There is a degree of hypocrisy there. Insurers should have every confidence from Members in this place that they are doing right by the defence sector in supporting its growth and development.
Why do all these complexities matter? As the hon. Member for Windsor touched on, they create serious consequences, because if challenges mount up, they could undermine our sovereign defence capability. If British firms cannot raise capital here, what will they do? They may choose to scale abroad or sell to overseas buyers rather than to the British base, or fail altogether. We could become more dependent on foreign supply chains for critical technologies. The Under-Secretary of State for Business and Trade, my hon. Friend the Member for Stockton North (Chris McDonald), has done some really strong work on critical minerals and our sovereign capability in that respect. We have to ensure that there is a sovereign financial base to support our sovereign defence industry.
The challenges we have talked about in procurement, ESG and access to finance hit SMEs the hardest. They do not have big teams of financial experts, and the larger primes can navigate the challenges more easily as they have access to wider capital pools that the smaller firms do not. There is a risk of strategic contradiction, because on the one hand we are asking defence firms to scale, innovate and deliver at pace, but on the other hand we seem to be tolerating a financial system that treats some firms as a reputational liability. That is not sustainable, to borrow a term. The issue is not necessarily ESG principles themselves, but the absence of clarity in how lenders apply their risk tolerance to defence. ESG concerns are only one part of the financing challenge facing defence firms, alongside credit risk, contracting structures and cash flow, but they are the tip of the iceberg. Because these issues are often poorly defined, they create uncertainty that deters lending.
What is missing is a shared understanding across Government, regulators and financial institutions that defence, when conducted lawfully, in line with UN weapons conventions and in support of democratic security, is not a problem but a public good to be enabled. The hon. Member for Windsor touched on the theme of their being nothing more ethical than lending to defence companies that are equipping our Ukrainian friends. Other countries around the world understand that. The US has been much more explicit in aligning its financial system with its national security priorities, particularly in terms of single-use and lethal military equipment.
What needs to change? There is an overwhelming case for a multilateral defence bank—such as the proposed defence, security and resilience bank—that would meet some of the financing challenges. We cannot just look at incremental fixes. I do not want to take up too much time on that, but there is a role for multilateral development finance.
As the report I wrote sets out, private capital alone is not filling the gap, particularly for SMEs in the dual-use space, and where finance does flow, it can be short term. I do not want to get into the details, but we need to make sure that the institutions of the state, be that the NSSIF—the national security strategic investment fund, an arm’s length body that is part of the British Business Bank—or the National Wealth Fund or UK Defence Innovation, sing together and make sure that their finance comes into innovative technologies.
We need to learn the lessons from the Defence Advanced Research Projects Agency in the US. I heard that a significant proportion of US GDP growth comes from the DARPA investments of the 1980s—of course, that agency invented the internet, the smartphone and so many other underlying technologies. Let us learn from the leadership role of DARPA.
Richard Foord (Honiton and Sidmouth) (LD)
The hon. Gentleman plainly knows a great deal about this subject and is educating a few of us on it. He talks about the US example; could he also reflect on the European Union regulatory regime around ESG, given that the EU is about to start investing considerably more in defence?
Mr Charters
When it comes to our European friends, we have to have cross-border financing. I have met some of the main German commercial lenders that want to come in; likewise, British financial services are investing in success stories such as Rheinmetall and some of the great European defence brands. We have to come together, not just with our European friends, but with Canada and other allied nations around the world, to approach defence financing on a multilateral basis. That is the real lesson.
Let me touch on what our adversaries are doing. They know that they need to innovate quickly when it comes to building up their own financing capabilities. Russia is moving towards more off-balance-sheet lending to a lot of its defence sector. Russian advance manufacturing companies are increasingly gaining access to the Chinese bond market. In general, the Russian war economy is mobilising at pace. Clearly, when it comes to some of our adversaries’ financing mechanisms, they are daring to do things differently—according, of course, to the rule books and ethics of their particular countries. We need to be agile enough to reform our own financing capabilities at pace, too. I am very concerned that we risk forcing British defence SMEs to seek foreign ownership, to offshore their operations or to seek finance overseas simply to survive. That is strategic self-harm when it comes to our sovereign defence capabilities.
You will be pleased to hear, Ms McVey, that I am about to close. In an era of renewed geopolitical competition, the question is not whether the state should play a role in defence finance, but whether we are prepared to act now in order to do so with the seriousness that our security environment demands. I believe that a strong defence financing sector acts as a deterrent to some of our adversaries and means that, where we need to scale industrial capability much quicker, we are ready to do so, if we have a defence financing revolution. This is not a choice between values and security; it is about recognising that, in the world we live in, the two are inseparable.
I hope the Minister will take this opportunity to set out how the Government can encourage lenders to turn on the taps for some of the innovative defence SMEs, no matter whether they are producing prisms, training our special forces or insulating our helicopters. There is nothing more ethical, in our modern world, than supporting the defence SMEs that are maintaining our collective security.
Ajax Programme
Luke Charters Excerpts(3 weeks ago)
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Mr Luke Charters (York Outer) (Lab)
It is a pleasure to serve under your chairship, Mr Stuart. I congratulate the hon. Member for Huntingdon (Ben Obese-Jecty) on introducing the debate, and thank him for his service in the Royal Yorkshire Regiment. May I take the House back to a visit I made to the NATO Forward Land Forces contribution as part of Operation Cabrit? I spent time in a Challenger 2 tank, and what was most impressive was not the size, the armour or the firepower, but the complete confidence that its crew had in the vehicle. Ajax was meant to deserve and earn the same trust. Before I come on to the failures in the programme, however, I want to say something about the workers in south Wales: they deserve credit for their graft and determination, not blame.
The Public Accounts Committee, of which I was previously a member, has made it clear what went wrong. It found that the programme was over-specified from the outset, with about 1,200 individual requirements imposed on what was supposedly an adapted off-the-shelf design. In reality, Ajax was neither off-the-shelf nor fully bespoke, and what was in between was far riskier. Never again must defence procurements over-specify requirements; that should be a red flag right from the start. Computer models were relied upon to assess vibration and noise rather than vigorous early testing. The Public Accounts Committee found that that approach had failed, and that the Department at the time did not fully understand the vehicle’s characteristics before subjecting soldiers to trials. Our armed forces should never have been used as human guinea pigs.
The independent Sheldon review is more damning: it found a culture in which bad news was softened as it travelled up the management chain. Senior leaders were left without a clear, honest picture of what was really happening. I thank all the soldiers who stepped forward to raise safety concerns. Despite the warnings that were given, the safety notices that were issued and the whistleblowers who came forward, GD repeatedly underplayed the scale of those issues, so it is reasonable to ask a simple question: if the design ultimately lay with the contractor, would the chief executive officer of GD be happy to have their son or daughter sent on to a battlefield in an Ajax? If those design failures did rest with GD, the taxpayer should not be left carrying the cost of retrofit.
I will touch briefly on defence exports. We must learn lessons from those abroad, particularly Leopard, which is a main battle tank. That platform was modular, upgradeable and interoperable, which meant it was a much stronger prospect for our defence export. When it comes to procurement, we should always bear defence exports in mind.
There are wider lessons too for the forthcoming defence investment plan, which must make a decisive break. We need a system that is capable of designing and testing earlier on, rather than one that rushes into production in the hopes that problems can be fixed later on. Ajax must be a turning point, not just for this vehicle, but for how we procure defence capability in this country in the future.
My hon. Friend the Minister is one of the most impressive forces in British politics; if he can climb Mount Everest in just five days—to raise money for our veterans, no less—I have no doubt about his ability to get to grips with one of the most challenging problems facing defence procurement today.
Ajax Armoured Vehicle
Luke Charters Excerpts(1 month, 3 weeks ago)
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Luke Pollard
The hon. Gentleman does himself a disservice by saying that he has only a keen interest. He is by far the best parliamentary questioner of the Ministry of Defence, and that keen interest is felt upon my desk with 30 parliamentary questions every single day. I appreciate his keen interest in the area. He raises a serious issue. In reshaping the Army’s capabilities to increase its lethality, as the Chief of the General Staff is seeking to do, there is a necessity to replace old platforms with new and to adjust how the Army fights. That is in particular using a greater combination of deeper fires, drones and other capabilities. There is a role, though, for armour and the different variations of armour from light to heavy, and that will be what we buy, as will be set out in the defence investment plan that will be published in due course.
Mr Luke Charters (York Outer) (Lab)
More than 30 soldiers fell ill, so I place on record our thanks as a House to Army Medical. Does my hon. Friend agree that when it comes to the forthcoming defence investment plan, Army Medical, of which 2 Med Group is headquartered in my constituency, will stand to benefit from that plan and that we will learn the lessons from this Ajax incident?
Luke Pollard
I thank my hon. Friend for talking about Army Medical and 2 Med Group in particular. The strategic defence review set out how we need to invest in our enablers, and that includes Defence Medical Services, ensuring that as we move towards warfighting readiness, we maintain the ability to treat any of our personnel who may be injured or need medical attention. That work is ongoing, and he should expect to see investment in the defence investment plan.
Remembrance Day: Armed Forces
Luke Charters Excerpts(2 months, 3 weeks ago)
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Al Carns
I thank the hon. Lady for such a moving contribution. May I say, in jest, that she has a very good choice of best friends? I know that her best friend’s memory will live long into the future, and it is a delight to hear that her son took part in that commemoration.
Importantly, we must look after bereaved children. If you do not mind, Madam Deputy Speaker, I am delighted to highlight that, following our little jaunt up Everest earlier this year, we managed to raise just under £500,000 for veterans charities and the specific needs of bereaved children. That will go to help loved ones across a plethora of different charities. We show our eternal gratitude for those families who have cared for members of our armed forces after returning from service—those who often bear physical and mental scars from the conflicts they have experienced.
The reason that this year’s world war two commemorations were especially poignant is that they were likely the last major events to feature veterans from the war in any great numbers. Even the youngest of those veterans who graced the ceremonies in London are now well into their 10th decade. One of them is Mervyn Kersh, who is 100 years old and took part in the D-day landings, then went on to Belsen a few weeks after it was liberated; he laid a wreath at the Cenotaph. The whole House can be proud that he will be watching Prime Minister’s questions tomorrow from the Gallery—what an honour it will be to welcome him here.
The living connection that Mervyn and his comrades provide to the war is a priceless asset, particularly at a time when the bloodiest European conflict since the second world war continues to rage in Ukraine. They understand the cost of conflict, because they lived through it, but they also understand the privileges we inherited after the war; 80 years of peace, prosperity and freedom can never, ever be taken for granted. We must be prepared to defend them in an increasingly dangerous world, and today a new generation of servicemen and servicewomen is doing precisely that. They are heirs to the veterans who proudly paraded on 8 May, and they are the guardians of that cherished inheritance. Today we also pay tribute to our servicemen and servicewomen working around the world to deter aggression, to safeguard British interests and to stand shoulder to shoulder with our allies, showing that Putin will not divide us.
Members will note that throughout this speech there has not been one ounce of politics. That could be called political naivety, but I call it a deeply held respect for those who have served and continue to serve; I welcome the debate and conversation on Thursday. This week’s commemorations remind us once again of the unbreakable bonds linking our heroes from the past with the armed forces personnel of today and indeed with those who will serve in the future.
Mr Luke Charters (York Outer) (Lab)
Joshua Mullinger is an able cadet in the sea cadets in York, who played an integral role in the York service of remembrance, and Conservative councillor and Lord Mayor Martin Rowley is a veteran. Will the Minister join me in commemorating the work of those very remarkable individuals?
Al Carns
The cadets play such an important part, with the sea cadets right at the forefront. Seeing Joshua thriving in that environment is absolutely superb, and hearing of Martin Rowley excelling after being in service is hugely admirable—I thank him in particular for his service.
As we remember the generations who have sacrificed so much, their testimony lives on, inspiring us to be strong in the face of adversity. Being resilient during difficult times and standing up for values that we believe in—that is the way we will remember our military heroes best, and that is how we will ensure that their priceless legacy of peace and freedom will endure.
Defence Industrial Strategy
Luke Charters Excerpts(4 months, 3 weeks ago)
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Mr Luke Charters (York Outer) (Lab)
Today’s blockbuster strategy completely rewires many of the institutions at the heart of our defence financing: the National Wealth Fund, the British Business Bank and UK Export Finance. With the news that the Chinese bond market may now be open to Russian defence companies, does my hon. Friend agree that we need to keep innovating and keep evolving how we do defence financing to support our own industrial base?
Luke Pollard
First, I thank my hon. Friend for the work he has been doing on how we open up finance to small businesses in particular and how we deal with some of the policies that restrict access to finance for those firms that work in defence. He is absolutely right that internationally we are seeing more of those nations that sometimes oppose our values come together, but we need to make sure we are innovating with our finance and that SMEs have access to capital. That is one reason why we are seeking to create a more predictable pipeline of acquisitions that enables businesses, especially small businesses, to borrow to invest.
Ukraine
Luke Charters Excerpts(5 months ago)
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Mr Luke Charters (York Outer) (Lab)
To secure peace in the long term for Ukraine we need to support its defence industrial base and therefore the financial sector that underpins it, but I am concerned that UK Export Finance red tape could be limiting UK-Ukraine defence partnerships. I also believe that we could launch new joint defence innovation funds. Will my right hon. Friend carefully consider these ideas and work with me to discuss how we can support Ukraine’s defence financing system?
John Healey
The short answer is yes. The slightly longer answer is that we are already working hard with Ukraine on some of these questions of joint ventures and joint industrial partnerships. Indeed, when President Zelensky visited Downing Street in June, our Prime Minister declared that this area of reinforcing our industrial connections and joint enterprise will help Ukraine in the fight now and help develop Ukrainian industry, but could also bring benefits to us and our armed forces in the future.
Oral Answers to Questions
Luke Charters Excerpts(8 months, 2 weeks ago)
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Dr Jeevun Sandher (Loughborough) (Lab)
Mr Luke Charters (York Outer) (Lab)
Catherine Atkinson (Derby North) (Lab)
John Healey
My hon. Friend is quite right about the fact that capabilities are now changing in weeks, not months or even years. He is also right about finance. That is why I went to the London stock exchange last week and closed the markets—I think it was the first time a Defence Secretary has ever done that. I wanted to signal that this Government want a new partnership with not just industry and innovators, but investors, and that means changing the way in which defence does its work.
Mr Charters
I have met outstanding UK SMEs, such as Supacat, 4GD and many others, which contribute to the sovereign industrial base that our security depends on. However, under the last Government, the percentage of Ministry of Defence direct expenditure going to SMEs fell, from 5% to 4%. Will my right hon. Friend confirm when this Government expect to surpass that record and therefore back the innovation we need to equip our forces and support our allies?
John Healey
I congratulate and thank my hon. Friend, as well as my hon. Friend the Member for Aldershot (Alex Baker), for the work that they are doing on innovative finance, which will help SMEs in future. I look forward to the publication of their Royal United Services Institute report shortly. I can confirm that SME involvement in the defence supply chain will be boosted by new spending targets that I will set in June to produce exactly the sort of result that my hon. Friend the Member for York Outer (Mr Charters) is looking for.
Ukraine Update
Luke Charters Excerpts(9 months, 1 week ago)
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John Healey
There was a moment when intelligence sharing with Ukraine was paused, but it was restarted with the momentum behind the talks, at the point at which Ukraine and the US were back on the same page. I am proud to say that the UK played a part in doing that and those arrangements are an important part of Ukraine being able to withstand the onslaught from President Putin.
Mr Luke Charters (York Outer) (Lab)
To support our Ukrainian friends, we need a robust sovereign industrial base. One proposal to help finance that and enhance supply chain security is the creation of a multilateral armament bank, such as the proposed Defence, Security and Resilience Bank. Does the Secretary of State agree with me that the Government should explore that potentially game-changing solution?
John Healey
Yes, I agree with my hon. Friend, and we are. That is part of the preparation for the defence industrial strategy. We want to find ways to maximise the investment going to British firms and British jobs, while making an important contribution not just to the defence and security of our own country, but to those of our allies as well.