Reeves to stop green groups from blocking defence investment
Banks and pension funds currently follow environmental, social and governance (ESG) standards drawn up by private firms, which are meant to measure their impact on wider society.
But pension giants and banks have been criticised for allowing these rules to restrict how much they invest in defence companies, on the basis that the firms do not promote social good.
Rachel Reeves plans to bring ESG ratings under the powers of the Financial Conduct Authority (FCA), to ensure there is only one set of rules in future. The Treasury is expected to lay out secondary legislation later this year to facilitate the change.
The new rules will benefit defence companies by making it clear that investors must take into account their positive role in keeping Britain secure.
A Treasury source told The Sunday Telegraph: 'Rachel has always been clear that supporting the defence industry is consistent with ethical investing.
'If opaque ESG ratings are getting in the way of private investment, that has to change.'
Officials are said to be looking to raise the profile of the Defence Investors' Advisory Group, and believe this would be a good opportunity to do so, a City source said.
The group, which will be comprised of venture capital and private equity firms, will support defence start-ups and advise on how best to generate investment. In addition, the Ministry of Defence is expected to devise a financial services strategy by March 2026.
A government consultation last year concluded that requirements for transparency around ESG ratings would support 'greater investor awareness of the defence industry's role'.
'Ill-considered anti-defence rules'
It comes after Sir Keir Starmer vowed to spend at least 5 per cent of the UK's GDP on national security by 2035, including core defence spending rising to at least 2.5 per cent by April 2027, and 3 per cent by 2034.
In March, more than 100 MPs and peers signed an open letter to the UK's finance industry urging it to 'sweep away ill-considered anti-defence rules' that limit investments in the arms industry.
The letter said: 'We must rethink ESG mechanisms that often wrongly exclude all defence investment as 'unethical'.'
Signatories include high ranking military figures including Baron Robertson of Port Ellen, the former general secretary of Nato, and Baron West of Spithead, a former Admiral in the Royal Navy.
Aviva, Royal London and the National Employment Savings Trust (Nest) were among pension giants to restrict defence investment on ethical grounds.
Later that month, António Simões, the chief executive of major pension firm Legal & General, said that defence companies should be considered ethical investments because countries need to be able to defend themselves.
He said: 'There's no reason in principle why investing in defence companies cannot be consistent with responsible investing.
'Governments should promote peaceful and inclusive societies but countries also may need to defend themselves. This is a UN-type of principle. We've always said that defence companies, including UK defence companies, can be invested in.'
Around £17 billion is invested in ESG funds in Britain. These ethical funds boomed in popularity after Covid with nearly 3,000 launched between 2020 and 2023 globally, attracting $600 billion of investment.
Concerns have been raised that funds with ESG labels do not return as much for investors.
Investors in actively managed 'green' funds would have seen their money underperform the average UK equity market by 3.8 per cent a year between the end of 2019 and the beginning of 2025, analysis by SCM Direct found in February.
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