FCA: Defence companies allowed to receive funds labelled as ‘sustainable’

The Financial Conduct Authority has issued a statement clarifying that its sustainable investment rules do not prevent financial institutions from working with defence companies.

As geopolitical tensions drive higher defence spending across Europe, the UK’s financial regulator has made its position clear: no financial institution will be punished for funding arms companies, even as part of their sustainable finance activities.

“The financial sector plays a vital role in supporting all sectors, including defence. There is nothing in our rules, including those related to sustainability, that prevents investment or finance for defence companies,” the FCA said in a statement this week.

The clarification comes after several years of financial institutions relaxing their rules around ESG investing, arguing that weapons are a necessity for peace, and therefore sustainability goals – an argument triggered by Russia’s invasion of Ukraine in 2022, and reinforced since Donald Trump took office this January. More than half of funds classified as “sustainable” had exposure to military weapons firms in 2022.

ESG-labelled funds: no sector excluded 

The UK regulator has published a number of rules in the last few years to guide sustainable finance activities: these include TCFD-aligned climate reporting requirements, sustainability disclosure requirements and investment labels and anti-greenwashing rules.

These are meant to ensure that information about investments claiming to be sustainable can be trusted and readily understood, and to improve the quality of sustainability-related information in the market – not influence financial institutions’ own policies about the type of businesses they wish to support, the FCA has now clarified.

Even the sustainability disclosure and labelling regime for ESG investment products “does not prescribe which activities or investments are sustainable, nor does it prevent investments in certain sectors, including defence”, according to the statement.

This means that people and organisations investing in funds using one of the FCA’s four sustainability labels (Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals) must look at the fine print to avoid unwittingly financing armed conflicts. 

“Some consumers will also want options to invest in line with their ethical values, so it is important they have the freedom to make choices about where they invest their money,” the FCA notes, adding that “some banks” may describe their own defence-related policies as part of their sustainability disclosures. 

Contrast with France’s responsible investment label

In contrast, France’s ISR label for socially responsible investments mandates the exclusion of companies producing weapons judged ‘controversial’ under several global treaties and conventions. 

Defence is not the only sector that must be excluded from funds using the ISR label: tobacco and fossil fuel companies are off-limits as well.