How pensions are disarming Britain

This article was first published in The Critic.

Whilst in power, the Conservative Party hollowed out the armed forces, told us the need for tanks is “over”, and imposed Net Zero on the economy, destroying the industrial capacity necessary to win wars. 

Perhaps that is why there was little fanfare when, shortly before Christmas, they announced their plan to form a new Sovereign Defence Fund if they win the next election. This would apparently mobilise £50bn for investment in new military technologies.

The announcement was light on detail but promised to provide risk capital to the defence startups pioneering the tech Britain needs to triumph on the modern battlefield. 

This seems a good idea. We need innovation to win modern wars. Innovation is only possible if companies can take risks. They can only do so with access to risk capital. 

However, the problem is that the provision of risk capital is not a function of the state — nor should it be. It is a function of capital, either individual or corporate.

Speak to any defence startup in Britain, and they will tell you the same story: over-regulation and timid investors make access to capital incredibly difficult. Our adversaries impose no such barriers. The answer is not to set up a state backed alternative in the hope that bureaucrats can allocate capital more efficiently than the invisible hand. Rather, it is to ask why capital is failing.

One major answer is Environmental Social and Governance (ESG), the now industry standard rules and norms which exclude defence investments, defining them as ‘unethical’, thereby denying the industry vital funds. 

Neither Kemi Badenoch nor James Cartlidge, Shadow Defence Secretary, would have had to look too far to realise this. Both represent constituencies situated within county councils with overwhelmingly Conservative majorities, Essex and Suffolk respectively. Between them these councils manage £15bn in pension assets. Both councils are fully signed up to ESG. 

To take one example: in 2022 Europe was plunged into a hot war on the Eastern front and the British Government began making grand pledges about bolstering defence. Meanwhile, Badenoch’s Conservative Essex council was pioneering and launching the UBS Life Global Equity Sustainable Transition Fund, and receiving many plaudits.

Shortlisted for Best Responsible Investment and winning the Investment Strategy of the Year at the Local Authority Pension Forum’s 2022 awards ceremony, it was apparently a non-issue that their new fund appears to exclude companies involved in nuclear weapons. 

This is despite the fact that every Conservative on the Essex pension committee would surely swear by the centrality of Trident in Britain’s defence posture. Not to mention the mammoth outperformance of defence, with BAE, Rolls Royce, and Babcock posting returns of 50 per cent, 100 per cent, and 146 per cent respectively this year. 

The aversion to nuclear doesn’t only hurt the large primes responsible for Trident. It impacts every company in their supply chains — effectively the whole British defence sector. The Dreadnought nuclear submarine alone has over 1000 companies in its supply chain; all will now be denied investment by Essex’s Conservative-controlled pension fund.

Cartlidge’s Sussex council is much the same story. Whilst we are not given exact investment funds, around half of all its equity investments are in either a “Climate Aware,” or “Low Carbon Transition Fund”.  

I do not wish to be harsh on either of these councils. This problem is endemic across the entirety of the £450bn local government pension system, and the £10trn British investment industry. Even the Parliamentary Pension Scheme, managing the pensions of MPs, who are almost unanimous in supporting increased defence spending, somehow excludes the defence industry.

The absurdity and hypocrisy of this cannot be overstated. Defence investment may conjure images of Bond villains intent on violating the Geneva Convention, but in reality it is those who dismiss defence who endanger us. There is nothing inherently unethical about defence investment. Quite the opposite: it is unethical to deprive British soldiers of the most advanced kit possible.

Rather than apologise for years of injecting anti-defence ESG into the bloodstream of the finance industry, the Financial Conduct Authority now unconvincingly tells us that there is nothing in their rules that prevents the investment or financing of defence. It is strange therefore that ESG funds never do invest in defence. That they are now allowed to may be true, but only in the most technical legal sense. In reality, the FCA states that their goal is to drive the financial sector towards Net Zero. Funds therefore align themselves with climate transition as requested. They are then blocked by the FCAs own rules from investing in “Controversial Weapons.” The underlying regulation includes nuclear in this category, and the Government has failed to say otherwise despite being asked. The FCA cannot pretend to be surprised that ESG funds wanting an easy life simply avoid defence. 

If the Conservatives are serious about funding defence, they should ensure their own house is in order and at least attempt put their money where their mouth is with their substantial pension assets. Then they should explain how they intend to defenestrate ESG, unlock billions in private capital for defence, and unleash the animal spirits of Britain’s defence firms and startups.