Grant Shapps warns Aviva over ethical investment policies on defence

Grant Shapps has warned Aviva against any “immoral” withdrawal of backing for defence companies, after a letter it sent to investors triggered a backlash from the Ministry of Defence.

Aviva, which manages £221bn of assets including insurance and pension funds, told customers last week it would be selling out of “certain companies that do not meet our Aviva Baseline Exclusion Policy”.

These would include companies that “might be involved in coal production, weapons/arms, and tobacco production”, the letter said.

The move prompted a swift intervention from Mr Shapps and James Cartlidge, the defence procurement minister, who spoke directly to the company about its apparent policy shift.

Aviva has since sought to downplay the letter and insisted it is not dumping UK defence stocks. It is understood the letter is thought internally to have been poorly worded.

A spokesman said: “Aviva is a massive supporter of, and investor in, UK defence. The UK defence sector plays a critical role protecting the human rights of citizens and supporting international stability. Aviva is a significant investor in UK defence companies, with £600m invested in the sector’s equities, and we have no intention of changing this.”

Aviva’s environmental, social and governance (ESG) exclusion policy document says products that “cause undue human suffering or fatalities” are “fundamentally misaligned” with its “core values”.

ESG policies typically rule out investing in arms companies because they tend to view the production of weapons and ammunition as unethical in all cases.

Mr Shapps said: “I have seen the reporting about Aviva and other companies potentially turning away from defence investment.

“There is nothing remotely unethical about investing in UK defence and a thriving industry is crucial to protect our way of life, particularly at a time of such global uncertainty.

“It would be immoral for investors to turn away from our defence firms – which help employ more than 200,000 people across the UK – without whom we would not have been able to supply Ukraine with the means to defend its freedom.

“We will always champion defence companies, both large and small, to ensure access to the financing they need to continue supplying our Armed Forces.”

The row comes after Mr Shapps raised the impact of ESG policies on the defence sector shortly after he took post in September. He said that the exclusion of defence companies from debt and equity capital for ESG reasons threatened to harm the economy.

ESG investing was popularised by BlackRock chief executive Larry Fink in the late 2010s. It aims to encourage companies that sign up to commitments such as reducing CO2 emissions or appointing board members from diverse backgrounds.

However, major investors including Mr Fink have sought to distance themselves from the policies in recent years after Russia’s invasion of Ukraine prompted a renewed focus on national security and the importance of defence companies.

Mr Cartlidge, the defence procurement minister, is understood to be in ongoing discussions with defence companies about the difficulties they are facing when it comes to receiving financing.

Dozens of companies have complained to the Ministry of Defence that ESG rules are pushing up their costs and in some cases leaving them struggling to access financial services.

Contracting giant Serco was pressured into withdrawing a bid to manage the UK’s nuclear weapons stockpile in 2021 after ESG-oriented investors threatened to dump the FTSE company’s shares.

In July, Kevin Craven, chief executive of ADS Group, the trade body for aerospace and defence companies in the UK, said City ethical rules had caused some manufacturers’ insurance premiums to jump by as much as 300pc.

4GD, a UK startup which offers combat training to soldiers using virtual reality and special effects, said many investors’ rules are difficult to fathom.

Robert Taylor, 4GD’s co-founder and a former Royal Marines reservist, said: “The mental backflips are frankly astounding. You will have funds that are willing to invest in drones carrying munitions but unwilling to invest in the munitions that the drones carry.”