Banks have been denying services to defence companies over environmental, social, and, governance (ESG) factors, according to a defence minister.
James Cartlidge, minister for defence procurement, said the Ministry of Defence has launched an investigation into the impact of ESG rules on the defence industry.
Defence industry associations have also said that their members have been denied bank accounts and financial services.
In a statement emailed to The Epoch Times, the defence procurement minister said, “Defence businesses large and small have told me that ESG rules have undermined them, from facing more expensive finance to being denied basic banking facilities.”
Mr. Cartlidge said Russia’s invasion of Ukraine has highlighted the need for “a strong defence industry, without which we could not have supplied Ukraine with the means to defend its freedom.”
“We are currently investigating the extent of this challenge—but I am clear that a strong defence industry supports well-paid jobs around the UK, and enables our armed forces to keep us safe in dangerous times,” he said.
Industry leaders have said over the past few years that the defence industry seems to have replaced tobacco and become the new “sin stock” that investors and insurers avoid.
Andrew Kinniburgh, director-general of manufacturers’ association Make UK Defence, told The Epoch Times that the organisation has seen problems “directly from [its] 400 or so members,” including denial of bank accounts, loans, mortgages, and other services.
ESG Ratings
ESG is an investing approach that takes into account the governance of a company and its environmental and social impact. The concept was formalised by a U.N. report in 2004 (pdf), and rating agencies have since added the metric to their evaluation processes.Mr. Kinniburgh said when he asked S&P, one of the top global rating agencies, if ESG ratings were to be blamed for the industry’s financial difficulties, he was told “probably partly” because “they assess risk on 1,000 different points and ... a number of those would include questions around whether you’re in defence or not.”
While many organizations are now investigating the reasons why the financial sector is wary of the defence industry, “no obvious answer” has been found so far, Mr. Kinniburgh said.
“None of the big banks will publicly say they don’t support the defence industry, but the reality on the ground is that they quite often don’t,” he said.
10 Percent Rule?
According to Mr. Kinniburgh, businesses seem to run into problems when more than 10 percent of their turnover is from defence.“That seems to be the tipping point, at which point financial houses, banks, insurers, that sort of thing, start asking questions and saying, ‘Oh, you’re in the defence industry, we don’t want to work with you,’” he said.
Members have also been denied either capital financing for equipment or factories or the ability to lease cars or mortgages, Mr. Kinniburgh said.
In a blog published on the ADS website in 2021, Harry Bengough, partner and head of the banking and finance team at Harrison Clark Rickerbys, said banks were nervous over “reputational risk.”
“If an adverse story breaks with one of their customers involved, questions will be asked about the bank’s involvement. At a time when banks are keen to burnish their credentials as good corporate citizens, the glare of this sort of bad publicity is something they can do without,” he wrote.
In a statement emailed to The Epoch Times, a spokesperson for UK Finance, which represents some 300 firms across the UK’s banking and finance industry, said: “Banks consider a number of factors in deciding whether to provide services to companies in the defence sector.
“These include ensuring compliance with any applicable laws and regulations, as well as a firm’s own risk management.
“Various firms have statements on their websites setting out their approach in terms of the defence sector, including what levels of due diligence are required.”
