A government’s primary duty is the defence of the realm. Most politicians acknowledged this but did not attempt to reflect it in policy until a European land war forced their hand. After years of neglect, Britain has committed to a 25 per cent increase in defence spending: worthwhile, though not far enough. Chancellor Rachel Reeves has said “this is a generational moment for our continent.” Starmer has described defence as “the number one priority of this government.”
ESG’s capture of British finance is far reaching
This renewed vigour will be meaningless if ESG orthodoxy continues to lock investment out of the defence industry. Labour appears to agree. In March, 100 of their parliamentarians wrote to Britain’s Banks and fund managers, urging them to ensure that ESG considerations do not slow investment into defence. They argued that we need to turn on “the financial taps to the (defence) firms that stand ready to deliver the best of British innovation, capability and skills.”
But ESG’s capture of British finance is far reaching, with the demonisation of defence embedded in almost every pension scheme.
As with many problems, it is easier to blame somebody far away, and Britain’s Banks and Fund Managers are an easy target. Yet MPs need to be aware of their own funds, within the Parliamentary Contributory Pension Fund (PCPF), and how it is beholden to the ESG view of defence.
The PCPF manages £1.2 billion and is controlled by a board of trustees, consisting of current and former MPs. Its chairman is Sir Brian Donohoe, a former Labour MP and trade unionist. Half of the £1.2bn is invested in equities and the majority of that is invested in “sustainable” funds: crucially, these blacklist the defence industry. MPs are right to criticise woke anti-defence attitudes in the financial industry: but regime change starts at home.
The largest single holding within the PCPF is the Blackrock Low Carbon Fund, which accounts for 40% of equity holdings. The fund is fully committed to ESG, and “seeks to limit and/or exclude direct investment into companies that have exposure to controversial or nuclear weapons.”
It is odd that parliament would invest heavily in a fund that excludes nuclear weaponry, when most MPs surely agree with Prime Minister Starmer that “with rising threats from Russia, China, and others, Trident remains essential to keeping Britain safe.”
Blackrock’s exclusions have resulted in an investment portfolio, which does not include a single British defence firm.
The second largest investment is the Schroders Sustainable Multi-Factor Equity Fund at 31 per cent of equity holdings. The story is much the same, though Schroders is more explicit. Schroders’ sustainability guidance states that they will not invest in a company deriving more than 5 per cent of its revenue from weapons sales. Therefore, under the guise of sustainability, the Schroders fund helps ensure that MPs’ pension funds stay a safe distance from the firms defending Britain.
These two investments show that at least 70 per cent of the PCPF’s equity holdings exclude defence.
We cannot know how much the PCPF would invest in defence without these exclusions. However, the FTSE 100 has an exposure to defence of 2 per cent. Using this 2 per cent as a proxy, we can estimate that MPs, via their pensions, are withholding £12 million of capital from British defence. An amount greater than the total valuation of many defence SMEs.
An even more pertinent issue is that if the pensions of those most avidly supporting defence exclude investment into defence, what does this mean for everyone else and their pensions?
If you haven’t, it is probably time to log into your pension and check both that defence isn’t being excluded, and that your pension is focused on maximising returns. As a rule of thumb, if the fund your money is invested in includes the terms “ESG,” “Sustainable,” or “Ethical,” you should be worried.
ESG investing is essentially a social scoring system, in which subjective judgements are made by people whose values don’t represent the public. This is how we have arrived in a situation where MPs’ pensions are not invested in BAE Systems, a cornerstone of the defence industry, but are invested, for example, in PetroChina, the Chinese state oil company, and in Tencent Holdings, operator of WeChat, apparently an integral part of China’s surveillance apparatus.
This is also bad for PCPF finances. Since 2022, BAE Systems, Rolls Royce and Babcock have returned 181 per cent, 525 per cent and 100 per cent respectively. Returns denied to the PCPF. The PCPF is a defined benefit pension scheme, meaning that MPs are guaranteed a pensionable income. Underperformance is paid for by British taxpayers who will have to step in and plug the gap.
The Labour MPs who wrote to Britain’s banks and fund managers should now turn to the PCPF trustees and have them divest from funds which punish defence.
