End woke war on defence: Pressure on ESG funds to back the sector

Leading military figures and politicians have issued fresh calls for more City investors to back the defence industry as conflict rages between Israel and Hamas.

Ministers have previously warned that Britain’s long-term security is being put at risk by environmental, social and governance (ESG) investors who shun defence firms.

The case for ESG funds to invest in defence companies gathered steam in the City following Russia’s invasion of Ukraine.

It gained further traction after Hamas attacked Israel, which launched retaliatory air strikes.

Traditionally, defence firms have been boycotted by ESG investors who have seen them as merchants of destructive weaponry.

However, this view is increasingly being challenged by those who believe the industry is vital for protecting democracy around the world.

Admiral Lord West, a former First Sea Lord, said: ‘Defence firms are crucially important and work hand in glove with our military so that we can actually fight and win against our enemies.

‘That seems to me a very worthwhile endeavour and something that should be encouraged rather than penalised in the City.’

City Minister Andrew Griffith said it is ‘misguided’ to exclude defence firms purely on ESG grounds.

He added that the recent conflict between Israel and Palestine as well as the war in Ukraine show that the defence industry is ‘more important than ever’.

ESG investing rules generally ban putting money into companies that produce weapons such as cluster bombs that can cause indiscriminate harm to civilians.

Brad Greve, finance boss at BAE Systems, said: ‘Conflict is still a part of our world and hence the need for a strong defence to protect a free society. Investors should encourage rather than punish the defence industry.’

He added: ‘Funds should be allowed to have their own rules, but a blanket exclusion approach prevents a constructive conversation on the positive role defence plays.’

Fund managers based in the UK have cut their holdings in companies such as BAE by an average of 9 per cent since the beginning of 2022, according to London Stock Exchange Group data. This has led to concerns in Westminster that the sector lacks support among British investors.

Jos Sclater, chief executive of London-listed Avon Protection, which makes bullet-proof helmets and gas masks to protect soldiers, said the defence industry is an ‘honourable’ one and should be included in ESG criteria.

The value of major defence companies listed on the London Stock Exchange has soared by almost £25 billion since Russia’s invasion of Ukraine in February 2022.

BAE Systems, which is worth £32.5 billion, has added £6.5 billion to its value in that time, while Rolls-Royce has soared by £12.9 billion to £18 billion.

Other firms including QinetiQ, Chemring and Babcock have also risen in value. Some of these gains are due to changes in strategy, but they show that ESG funds could have made better returns by investing in defence.