ESG Not To Blame For Underinvestment in Defence Industry

UKSIF has welcomed the high-level findings of a new RUSI report that shows ESG investment approaches and rules are not hindering investment in the UK’s defence industry.

This paper, written by RUSI research analyst Dr Linus Terhorst, explores the financing challenges that defence companies are facing, as European nations re-arm due to tensions with Russia.

It shows that the main barriers to growth are structural issues, such as political calculations for procurement and the long-term cyclicality of many defence products, which have limited the sector’s “ability to attract investment”. It also suggests that many small and medium-sized enterprises (SMEs) often “lack the resources” to comply with international banking standards, which are unrelated to ESG and ensure financial institutions can access foreign international markets.

But the report makes clear that ESG rules and investment approaches are not impeding wider growth in the sector, stating:

“ESG disclosure and labelling regimes, as well as many investors’ own ESG investment approaches, generally do not preclude financing and investment in defence and have little impact on the defence industry’s access to capital.

“Some fund managers have implemented defence-specific exclusions in the funds they manage and brand as sustainable. But such exclusions of entire sectors are not mandated by ESG rules.”

“This paper concludes that ESG regulatory requirements and ESG-related concerns have only a limited impact on investment in defence and the defence industry’s access to financial services.”

The report’s publication follows a call by over 100 Labour MPs and peers earlier this year, urging UK banks and investment firms to relax their rules on investing in defence companies. They signed a joint letter saying the government “must rethink ESG mechanisms that often wrongly exclude all defence investment as ‘unethical’.”

However, the report says the public debate and framing around the relationship between sustainable investing and defence has become misunderstood, stating:

“While some sustainable-branded funds exclude defence-related businesses, these exclusions are mostly based on ‘ethical’ or reputational concerns rather than on ESG regulatory reporting requirements

“This misconception is reinforced by the fact that ‘ethical’ investment funds often follow ESG regulatory standards in their allocation of equities

“Some defence companies exacerbate the problem of ESG being blamed as the reason for their lack of access to investment; representatives interviewed for this paper claimed that ‘ESG’, loosely defined and used, is responsible for their difficulties in accessing basic financial services.

“Putting the blame on ‘ESG’ is often unsubstantiated, as financial regulators have not imposed such exclusions.”

James Alexander, UKSIF chief executive, whose members have over £19 trillion in assets under management, welcomed the report’s core high-level findings, saying:

“Emerging defence firms are clearly experiencing financing issues, but this report draws a line under the notion that ESG standards are stopping capital from flowing into the industry.

“This analysis shows that structural issues, such as complex procurement processes and long development cycles, are the main barriers to business growth, while SMEs face challenges complying with important international banking standards.”

Alex Baker MP, who co-authored the original letter by the Labour MPs, also welcomed the report. She said:

“Financing is the lifeblood of our defence industry, and this report makes an important contribution by showing how we can get capital flowing to where it is needed most.

“The war in Ukraine has underlined the urgency of building greater capacity and resilience, and that depends on supporting the SMEs and supply chains at the heart of our industry.

“I welcome the report’s focus on tackling financial barriers, because without action our innovators and local employers will continue to face unnecessary hurdles. By recognising these challenges and setting out practical solutions, this report helps point the way to a stronger defence sector that can keep Britain safe and support prosperity in communities across the country.”

Read the full report here: https://www.rusi.org/explore-our-research/publications/insights-papers/are-esg-standards-scapegoat-stalling-defence-growth

Download this press release here: https://uksif.org/wp-content/uploads/2025/09/RUSI-report-release-25sept25.pdf