Defence companies facing uphill battle for financing

Banks have been caught between campaign groups protesting against such investments, defence companies claiming to be unfairly “debanked” and politicians calling for defence lending to be classified as “ethical” or ESG (environmental, social and governance) in the national interest. As the former chair of BAE Systems, Roger Carr, has said, it has become vital to distinguish between “highly regulated, ethically led and government-backed defence contractors” and “freewheeling arms dealers”. But how that is done is still being figured out.

In March, more than 100 Labour MPs and peers signed a letter urging banks and financial services to treat arms makers as ethical investments. That may be helpful from the point of view of national security and deterring Russia. But the Financial Conduct Authority said it was not necessary: “There is nothing in our rules, including those related to sustainability, that prevents investment ... for defence companies.”

The MPs were focused on the wrong solution, said James Alexander of the UK Sustainable Investment and Finance Association. “A massive problem for defence companies is the amount of time it takes to get MoD [Ministry of Defence] procurement. If you’re an SME [small and medium-sized enterprises], you sometimes have to try to keep your company going for six years before getting a contract signed. ESG is not the problem here.”

There has been a steady stream of claims of debanking – a term that has gained traction since Nigel Farage settled a high-profile dispute with Coutts. One source claimed to know of a defence tech company from outside the UK that had raised £12m, but had had to take out an account with Revolut.

A survey from ADS, a trade body representing 1,500 small defence companies, found nearly three-quarters struggled to access basic banking services. It claims that reputational concerns have been a “key driving factor” behind the trend.

It may have a point. In the past year, activists have targeted multiple branches of Barclays to protest against its work for companies that produce equipment used by the Israel Defense Forces.

Earlier this year, Barclays said questions about why it “invests” in nine defence companies supplying Israel “mistakes what we do”. The bank trades in shares of listed companies in response to client instruction and, while it provides financial services, Barclays says it is not making investments for itself and is not a shareholder or investor.

The bank updated its policy in 2023 to say it will not finance firms “known to trade in, or manufacture cluster munitions and their components, chemical and biological weapons, and antipersonnel landmines”.

The research, collected by anti-nuclear campaign group Don’t Bank on the Bomb, found Barclays had the largest hike (59%) in loans and underwriting for defence companies since 2022, while HSBC’s financing for defence companies decreased. The data comes from annual reports, financial statements and company registries, and does not include all defence companies, just those with significant contracts related to nuclear weapons, as per the Department for

Business and Trade’s focus. These include most industry big names, among them Lockheed Martin, Rolls-Royce and BAE Systems, plus Babcock, the best performing FTSE stock this year.

With Nato leaders’ commitment to invest 5% of GDP on defence by 2035, the industry has well and truly buried its “sin stock” status. Keeping it that way will require more clarity.

Photograph by BAE Systems