Browse Research briefingsCDP-2026-0014

BRIEFINGCDP-2026-0014 · Commons Debate Pack · Business and Transport Section

The impact of environmental, social and governance requirements on the defence industry

A Westminster Hall debate has been scheduled for 2:30pm on 28 January on the impact of environmental, social and governance (ESG) requirements on the defence industry. The debate will be led by Jack Rankin MP.

Defence policyFinancial services

Last fetched 22 May 2026 · commonslibrary.parliament.uk

Briefing

Environmental, social and governance (ESG) requirements are increasingly used by investors and financial institutions to inform decisions on lending, investment and the provision of financial services. These frameworks aim to encourage responsible business practices and to help manage long term financial risk.

Concerns have been raised by politicians and the defence industry that the application of ESG criteria may restrict British defence companies’ access to finance and related services.

This is particularly relevant in a world where threats are “more serious and less predictable than at any time since the end of the Cold War”, according to the government’s 2025 Strategic Defence Review. (p3)

The Strategic Defence Review also highlights the importance of private investment, stating that the sector must make “a concerted effort to unlock private capital and expertise”. (p53)

Further information on the 2025 Strategic Defence Review is available in the Library’s briefing on the topic.

The government’s Industrial Strategy defence sector plan also refers to the need to make the sector more attractive to private investment. (p42)

What are the ESG requirements for finance?

One way in which some argue ESG has affected the defence sector is the use of ESG ratings by the financial sector to inform and guide investment decisions.

ESG ratings are produced by third party data and analytics companies and score different investments. These scores could apply to individual companies, or composite products like funds which comprise shareholdings and investments in various companies.

Research by the Financial Conduct Authority (FCA), the sector regulator, found the majority of surveyed investment management firms used ESG ratings.

Such products may appeal to investors and so are offered by financial firms, for a number of reasons:

Investing companies have their own targets with respect to ESG and wish their investment decisions to contribute to those targets.
Investors may view investments with high ESG ratings as more stable in the long term.
Investors may wish to drive change in companies; that is by investing in products with high ESG ratings, they encourage companies with low ratings to improve.
Investors may simply prefer to invest in “ethical” products.

Ratings are not standardised between different companies; the method by which ESG ratings providers assess a company’s performance and the scoring metric they use differs; in some cases, providers may instead give an opinion on an investment rather than a score.

Around half of firms using ESG ratings surveyed by the FCA used more than one ratings provider, primarily because they each offer different levels of coverage. Other reasons include to mitigate inaccuracy risks and as a check against a financial firm’s own internal ratings of an investment option.

Regulation

There is no regulatory requirement for investment firms to use such ratings, or for investors to pay attention to them.

However, from June 2028, firms wishing to provide certain types of ESG ratings in the UK will need authorisation from the FCA, and follow the FCA’s rules.

In 2023, recognising the increasing role ESG factors play in investment decisions, the Treasury consulted on making ESG rating a regulated activity.

It noted firms had raised concerns about ESG ratings: some providers’ methodologies were opaque, and there are potential conflicts of interest where a provider also advises a rated entity on how to improve that rating. Research from the FCA also noted users of such ratings were concerned about the quality of their data.

Respondents to the government’s consultation supported plans to regulate the sector though some were concerned with the scope of proposed regulation and its potential effects. In December 2025 Parliament passed The Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 making the provision of ESG ratings a regulated activity from 29 June 2028. From this point, providers will need to have FCA authorisation and comply with the FCA’s rules.

New regulations

In December 2025 the FCA published a consultation on what those new rules for ESG ratings providers should be.

The FCA proposes to require providers to meet existing baseline standards which apply to most other FCA-regulated firms; these include standards for how businesses should manage risk and certify key staff.

Additionally, the FCA has proposed rules tailored to the sector across four pillars:

Transparency: Requires firms to disclose certain details about how they calculate ratings, their data sources and objectives.
Governance, systems and controls: Requires firms to demonstrate the integrity of their ratings process including quality control, data validation and methodology reviews; also requires firms to maintain operational responsibility for ratings.
Conflicts of interest: Requires firms to identify, prevent, manage and disclose conflicts of interest.
Stakeholder interest: Requires firms to offer rated entities the opportunity to correct factual errors, and other stakeholders the right to provide feedback to ratings providers.

The consultation ends on 31 March 2026.

Has the defence industry been affected by ESG requirements?

There are varying views on the significance and impact of ESG requirements on the defence industry’s ability to access finance.

A PwC report on the evolving role of ESG in the defence industry suggests that in the past, defence companies were often excluded from ESG-focused investment due to ethical concerns linked to weapons and military activity.

However, the report finds that this is becoming less of an issue, as growing security concerns following Russia’s invasion of Ukraine have led to a more favourable view of the defence sector and prompted some investors and ESG frameworks to reconsider exclusions.

This trend can be seen in data from financial services firm Morningstar. The chart below shows how much of European share-based investment funds is invested in aerospace and defence companies.

It shows that exposure to aerospace and defence has increased since 2022 across European funds, including those with ESG labels. While non-ESG funds still tend to have higher exposure overall, ESG funds have also steadily increased their holdings, especially in actively managed funds.

Source: Morningstar, How ESG Funds Learned to Love Weapons, 15 Jul 2025

The Royal United Services Institute (RUSI) suggests ESG standards do not generally block investment in defence.

It highlights confusion between ESG funds and ethical funds, which often exclude defence but represent only a small share of investment.

The report argues that defence growth is more limited by structural issues such as procurement uncertainty, export controls, long production cycles and payment delays. It also finds that small and medium-sized enterprises (SMEs) in the defence industry find it more difficult to access finance and banking due to banks’ own compliance policies rather than ESG rules.

It calls for clearer policy guidance, better communication from financial institutions and targeted support to help defence SMEs access finance.

The impact of environmental, social and governance requirements on the defence industry

Defence policyFinancial services

Last fetched 22 May 2026 · commonslibrary.parliament.uk

Briefing

Concerns have been raised by politicians and the defence industry that the application of ESG criteria may restrict British defence companies’ access to finance and related services.

The Strategic Defence Review also highlights the importance of private investment, stating that the sector must make “a concerted effort to unlock private capital and expertise”. (p53)

Further information on the 2025 Strategic Defence Review is available in the Library’s briefing on the topic.

The government’s Industrial Strategy defence sector plan also refers to the need to make the sector more attractive to private investment. (p42)

What are the ESG requirements for finance?

One way in which some argue ESG has affected the defence sector is the use of ESG ratings by the financial sector to inform and guide investment decisions.

Research by the Financial Conduct Authority (FCA), the sector regulator, found the majority of surveyed investment management firms used ESG ratings.

Such products may appeal to investors and so are offered by financial firms, for a number of reasons:

Investing companies have their own targets with respect to ESG and wish their investment decisions to contribute to those targets.
Investors may view investments with high ESG ratings as more stable in the long term.
Investors may wish to drive change in companies; that is by investing in products with high ESG ratings, they encourage companies with low ratings to improve.
Investors may simply prefer to invest in “ethical” products.

Regulation

There is no regulatory requirement for investment firms to use such ratings, or for investors to pay attention to them.

However, from June 2028, firms wishing to provide certain types of ESG ratings in the UK will need authorisation from the FCA, and follow the FCA’s rules.

In 2023, recognising the increasing role ESG factors play in investment decisions, the Treasury consulted on making ESG rating a regulated activity.

New regulations

In December 2025 the FCA published a consultation on what those new rules for ESG ratings providers should be.

Additionally, the FCA has proposed rules tailored to the sector across four pillars:

Transparency: Requires firms to disclose certain details about how they calculate ratings, their data sources and objectives.
Governance, systems and controls: Requires firms to demonstrate the integrity of their ratings process including quality control, data validation and methodology reviews; also requires firms to maintain operational responsibility for ratings.
Conflicts of interest: Requires firms to identify, prevent, manage and disclose conflicts of interest.
Stakeholder interest: Requires firms to offer rated entities the opportunity to correct factual errors, and other stakeholders the right to provide feedback to ratings providers.

The consultation ends on 31 March 2026.

Has the defence industry been affected by ESG requirements?

There are varying views on the significance and impact of ESG requirements on the defence industry’s ability to access finance.

This trend can be seen in data from financial services firm Morningstar. The chart below shows how much of European share-based investment funds is invested in aerospace and defence companies.

Source: Morningstar, How ESG Funds Learned to Love Weapons, 15 Jul 2025

The Royal United Services Institute (RUSI) suggests ESG standards do not generally block investment in defence.

It highlights confusion between ESG funds and ethical funds, which often exclude defence but represent only a small share of investment.

It calls for clearer policy guidance, better communication from financial institutions and targeted support to help defence SMEs access finance.