MPs warn ESG rules risk limiting defence industry

Members of Parliament have raised concerns that environmental, social and governance (ESG) rules are restricting access to finance for UK defence firms, warning that current approaches could undermine industrial resilience and national security.

The issue was debated in Westminster Hall on 28 January, during a discussion secured by Conservative MP Jack Rankin, which examined the impact of ESG requirements on the defence industry.

Opening the debate, Rankin argued that the strategic environment had changed fundamentally, telling MPs that reliance on existing international norms was no longer sufficient in an increasingly dangerous world. “We live in a much more dangerous world and we cannot rely on the international rules-based order to protect us,” he said. “Hard power is the most material reality.”

Rankin warned that while adversaries were mobilising their economies at pace, the UK and its allies risked constraining their own defence sectors through financial and regulatory barriers. Several MPs focused on difficulties faced by defence companies in accessing private finance, particularly where investment funds or banks applied ESG criteria that effectively excluded defence-related activity.

Liberal Democrat MP Edward Morello said his party had proposed the creation of £20 billion in defence bonds to help finance the rapid expansion of defence manufacturing capacity in the UK. He argued that significant private capital existed but was not being utilised.

“There is billions of pounds in funding waiting to be unlocked that would cost the taxpayer nothing,” Morello said, warning that defence firms were being deprived of investment because funds prioritised ESG requirements “explicitly or implicitly” regardless of returns. He added that while ESG frameworks were often intended to promote responsible investment, their practical effect was sometimes to discourage defence activity altogether.

“The ESG system implies in some sense that defence investment is unethical,” Morello said. “But there is nothing less ethical than sending British sons and daughters into battle under-equipped.” Concerns were also raised about the long-term impact on regional defence employers and the UK’s industrial base.

Liberal Democrat MP Adam Dance highlighted Leonardo’s helicopter facility in Yeovil, noting that the company had invested heavily in environmental and social initiatives, including education partnerships and renewable energy. He questioned whether firms could realistically be expected to meet ESG obligations without consistent government support through contract awards.

“If defence firms are to meet those obligations, the Government need to award contracts such as the new medium-lift helicopter,” Dance said, warning that failure to do so could result in the permanent loss of industrial capability and local economic benefits.

Labour MP Luke Charters also addressed the issue, arguing that ESG frameworks themselves should not act as a barrier to lending, particularly for small and medium-sized enterprises within the defence supply chain. Drawing on his professional background in financial compliance, Charters said ESG rules were frequently misunderstood or misapplied by financial institutions.

“ESG does not need to get in the way of lending to SMEs,” he told MPs, cautioning against conflating ESG requirements with broader ethical or commercial decisions made by firms. He warned that long-standing assumptions surrounding defence investment had become deeply embedded across multiple sectors. “Sadly, many of those old assumptions are embedded and entrenched in our financial services industry, universities and politics,” Charters said, adding that this was having a “deeply damaging effect on British defence companies and ultimately on our ability to defend ourselves.”

The debate also touched on international comparisons, with MPs noting that adversaries were adopting different approaches to defence financing. Charters said Russia was increasingly turning to alternative funding mechanisms, including off-balance-sheet lending and access to overseas capital markets, as part of the mobilisation of its war economy.

Speakers from across the chamber argued that the UK needed to reconsider how defence was treated within financial and regulatory frameworks, particularly as the government seeks to accelerate rearmament and expand domestic manufacturing capacity. The discussion follows similar concerns raised in recent Defence Committee evidence sessions, where ministers acknowledged the risk that inflation and constrained industrial capacity could erode the impact of rising defence budgets if procurement and financing mechanisms are not reformed.