This week, William Hague’s compelling article in The Times sparked conversations about transitioning to ESSG – an expanded ethical investment framework that integrates security with traditional ESG factors.
This is no small matter – it’s a seismic shift for the UK defence sector, where ethical investment and national security aren’t just crossing paths, they’re colliding.
Clare Stockdale, Associate Director at LAVA, is on the frontline of this debate. Here, she explores the challenge for UK defence SMEs to thrive amidst these changing ethical and investment landscapes, addressing the vital questions of securing investments and strategic growth.
For the innovative UK-based SME defence business, a shift in investor appetite coupled with government support is fundamental to unlock funding in this strategically important sector. Investment in businesses that are at the forefront of technological advancement is crucial for the UK to have a competitive advantage in the face of a rapidly changing threat environment, while offering significant potential returns to investors.
Unfortunately, for the growing defence company, this investment can be difficult to secure. Many investors are reluctant to invest in the sector full stop. This can even extend to engineering and consulting businesses who generate a portion of revenue from defence. Of the investors that are willing, many more are unable to invest in the lethal end of defence, which even precludes companies for whom this only makes up a small part of their business.
Within funds, there may be a single investor in the fund that doesn’t have an appetite for the sector. This exclusion could create too high an administrative burden for an otherwise attractive investment to be worthwhile.
These barriers mean that it is more difficult, time consuming, and expensive to secure capital, therefore hampering growth when it is needed more than ever.
Coupled with the R&D costs necessary to stay ahead, and the significantly increased costs of manufacturing, this means that as a country we are not able to realise the full potential of the innovative talent we have nurtured and the pioneering technology that we have built, and risk falling behind.
LAVA supports SME businesses at the forefront of defence to secure funding and strategic partnerships, and are acutely aware of the challenges faced.
While ESG criteria are important for encouraging all businesses to improve their positive impact upon society, the environment, and the economy, the natural conflation with ethics has led investors to shy away from defence. This leads to confusing lines being drawn.
A soldier’s uniform may be acceptable while the gun in the hand is not, when they equip the same soldier doing the same role.
We need to recognise the vital role that the defence industry plays in national security and prosperity, and place the same importance on this that we place on strong governance, social equality, and minimising environmental damage.
However, there are positive signs that the tides are shifting. Writing in a joint opinion piece on ESG in July 2023, Treasury Minister Andrew Griffith and Defence Minister James Cartlidge argued that defence is already aligned with ESG parameters “there could hardly be a bigger or more positive social responsibility than investing in peace.”
William Hague wrote in the Times this week with some urgency that it is time to insert “security” into ESG, to consider ESSG parameters. In an incredibly powerful speech at the Defence Ventures Summit this month, Katherine Boyle of the venture capital fund Andressen Horowitz raised the importance of investment in defence.
It is also a challenge that the British Business Bank is aware of.
Unlocking funding and supporting innovation in this sector is going to take significant cooperation between the government, investors, the defence industry, and citizens, and it is cooperation that is urgently needed.
Are you involved in the defence sector or an investor rethinking the impact of your portfolio? At LAVA, we are actively engaged in reshaping the conversation around defence investments and their intersection with ESG. We’re not just part of the dialogue; we’re leading it, challenging perspectives and driving forward-thinking strategies.
If you’re ready to be part of this crucial shift and explore innovative investment opportunities in defence, we’re here to guide you. Reach out for a confidential discussion with our M&A experts to understand how we can help you navigate this changing landscape and unlock the potential in this strategically important sector.
