Shapps warns that ethical investing poses a serious threat to Britain’s defense industry.

Grant Shapps said that ethical investing harms Britain’s economy, and could undermine the defense sector.

The new defence secretary said that Britain’s defense industry is not only responsible for more than 200,000 job opportunities, but also crucial to the maintenance of the nation’s lifestyle.

Mr Shapps, in a Tuesday address to Parliament, said that defence companies were being denied access to equity and debt capital on the basis of environmental, social, and governance (ESG).

This not only threatens a part of the UK economy that directly and indirectly supports more than 200,000 jobs through Ministry of Defence spending, but also fails to acknowledge that the UK defence industry is vital to protecting our way of living.

“Those who want to provide ESG ratings to help inform [investing] decisions should be more transparent about their methodology, and correct any errors that are brought to their attention.”

City fund managers are increasingly focusing on ethical investment, and Mr Shapps has attacked the ESG sector.

ESG policies are designed to encourage investments in companies who sign up for commitments, such as reducing carbon dioxide emissions or appointing diverse board members.

Larry Fink, BlackRock’s chief executive officer, popularised the ESG concept in late 2010.

He distanced himself earlier this year when he said that the term “weaponised” had become a weapon.

Some people in the City believe that ESG principles mean to avoid certain sectors and companies, such as the arms trade.

Shapps also highlighted in his statement on Tuesday the ongoing Treasury consultation regarding regulation of the ESG industry.

According to the former Business Secretary introducing regulation would improve transparency and encourage “good conduct in ESG rating business”.

Two years ago, the problems with ESG investments were brought to light when outsourcing giant Serco had to abandon a bid to handle Britain’s nuclear weapon stockpile.

ESG-oriented funds warned Serco’s bosses that they would dump shares in the FTSE company if this deal went through.

They argued that nuclear weapons violated their ethical principles.

4GD, an ex-Royal Marines defence company, announced in February that it was forced to seek capital on the US markets after British investors shunned them.

Robert Taylor, 4GD’s co-founder, stated: “The UK underestimates defence.” It is becoming more and more of a moral debate as to whether investing in defence is the best thing to do.

The trade association ADS which represents defence companies and aerospace firms complained last year about the “misapplication of ESG policies” contributing to an “increasingly restrictive environment” for their members.

On Tuesday, James Cartlidge, the defence procurement minister, appealed again to the City to stop treating defense as an “enemy”.

He said that the sector is a double-win – it provides jobs and ensures our safety. It benefits Britain.”