Matthew Lynn

Ethical investors have weakened the West’s defences

Ethical investors have weakened the West's defences
A world war one munitions worker (Getty)
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It won't be the first, or indeed the most serious, casualty of the war in Ukraine. It probably won't be the second, third or even fourth. Even so when the final reckoning of the Russian onslaught is tallied up, there can be no question that the ESG – environmental, social and governance – will be on the list. Why? Because its self-righteous concentration on progressive causes like race and gender, and crucially its wishy-washy pacifism, have undermined the West's ability to defend itself.

Rewind just a few weeks and much of the City was obsessing over ESG issues. Fund managers were harassing the oil companies to stop developing domestic supplies of gas, even though our failure to do so has increased our dependence on Russia. And critically, they were demonising defence companies on the basis that making weapons was immoral or wrong. Many companies had slowly started winding down their defence units. It was not worth the hassle of trying to justify them to woke fund managers, nor was it worth the damage done to the share price.

That mattered. True, the City can't stop companies from making defence equipment. But when a sector is shunned by investors then two things happen. First, capital slowly drains out of the sector. Factories don't get retooled. New projects stay on the drawing board. And capacity slowly starts to wither away. Next, businesses gradually wind down their involvement in the industry. It becomes a backwater, bereft of talent and energy. Like the tobacco industry over the last 20 years, it becomes untouchable.

The government has now launched a charm offensive to try and persuade the City that it should be backing the UK's defence manufacturers. Yet that should hardly be necessary. ESG made a critical mistake. Under the influence of left-wing activists, many investors decided that making weapons was wicked and destructive. Many of its leaders probably imagined western weaponry was being used to fight capitalist, neo-colonial wars. It failed to recognise that, in reality, a robust arms industry, along with a well equipped and well-motivated armed forces, is the best defence we have of democracy and freedom. We might be relearning that lesson now, but, to put it mildly, it is a little late in the day.

The UK has always been a leading global defence manufacturer. It has some of the best technicians in the world. We should be supplying the weapons Ukraine needs to defend itself. More importantly, we should be developing the technologies that will deter Vladimir Putin from advancing any further west. Over the last decade, a simple-minded ESG movement has steadily undermined the defences that keep us safe. Once the war is over, the City should remember that.