The Financial Conduct Authority’s (FCA) statement on sustainability regulations and their impact on the defence sector reassures financial institutions that sustainable finance rules will not be an obstacle to the government’s ambition for investment in the UK, experts have said.
The recent announcement comes amid growing concerns about the compatibility of sustainable finance rules with investments in defence companies. The FCA statement emphasises that its sustainability rules do not prevent investment in or financing for defence companies, though financial firms may operate their own defence-related investment policies.
The FCA's sustainable finance rules apply to firms providing financial products and services as well as some listed companies. They have two primary aims. First, to ensure information about investments claiming to be sustainable can be trusted and readily understood, and second, to improve the quality of sustainability-related information in the market. These rules do not require financial institutions to treat defence companies differently because they are in the defence sector.
William Hall, public policy expert at Pinsent Masons, said: “The announcement comes amid a governmental shift to include a greater focus on defence as they seek to progress their top line political target of economic growth through a combination of public and private investment.”
The ongoing situation in Ukraine is resulting in an intersection between two core UK government objectives – ensuring national security amidst a turbulent geopolitical environment and securing economic growth. In this context, the government views increased investment in defence as essential. “With the ongoing processes of the Strategic Defence Review and the Spending Review set to conclude in the coming months, we can expect further clarity on how the government will do this,” said Hall.
While the statement makes clear that the FCA rules do not prohibit defence investment, they should not be confused with financial institutions’ own policies relating to the type of business they wish to support and their own appetite. It remains the responsibility of individual lenders and investors whether they provide the capital defence companies need.
James Hay, sustainable finance specialist at Pinsent Masons, said: “The FCA statement also draws a distinction between the defence sector as a whole and ‘activities related to controversial weapons’ which will provide reassurance to financial institutions who have faced pressure from certain non-governmental organisations to divest from tracker funds which contain defence stocks.”
The FCA clarification has been seen as a positive step towards ensuring that the financial sector can continue to support the defence industry while adhering to sustainability regulation. This is an area which has been already under consideration in response to the heightened geopolitical risks of recent years.
Hay said: “At the current time, certain practicalities butt up against government intent. Changes will be needed if the government wants to support the defence industry through capital markets. It is not as simple as just directing asset managers to invest in defence as there might be policy-based exclusions or the investment mandate might restrict allocating to UK defence companies.”
“Sustainable funds, including some labelled under the UK’s Sustainability Disclosure Requirements regime, may have investment objectives that conflict with defence investments, and other types of funds may have concentration limits on small caps. The FCA clarification presents an opportunity for banks and asset managers to re-evaluate their exclusionary policies and build industry consensus around how they can invest in defence, including even in sustainable funds where appropriate,” he said.
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