Banks have been accused of putting the nation’s security at risk by refusing to do business with Britain’s defence industry.
The Ministry of Defence has launched a probe after dozens of military companies “large and small” complained they were denied banking services because of the nature of their work.
Experts warn the trend could see vital defence companies collapse, leaving the country reliant on foreign firms and “dramatically reducing national security”.
The growth of environmental, social and governance policies, which encourage firms to invest “ethically”, has been blamed.
But the way they are being implemented has been branded “woke nonsense”.
The policies are designed to protect financial service firms from accusations of damaging the environment or exploiting workers.
But Labour MP Kevan Jones, who sits on the defence select committee, said: “I’m sure these bankers will be more than happy to read out their codes of ethics to Russian forces as they land on our beaches.”
The MoD probe was launched days after the Treasury ordered its own inquiry into claims that banks are closing customers’ accounts because they did not like their views on controversial issues.
Bosses of small defence businesses claim they have been refused accounts, had their existing accounts closed down, been refused insurance or denied capital loans.
Former UKIP leader Nigel Farage said his account had been closed because of his role delivering Brexit. It was later claimed that private “royal bank” Coutts made the move because he fell below its wealth threshold, but Mr Farage maintains politics is to blame.
The defence, security and aerospace sector employs 417,000 people and provides vital equipment to the Armed Forces.
An industry insider said: “Defence is the new tobacco as far as banks are concerned. It’s seen as a dirty word but they are putting firms at risk due to this woke nonsense.”
Defence Minister James Cartlidge has confirmed the MoD is investigating and warned that the industry is needed to keep the nation safe.
He said: “Russia’s invasion has highlighted why we must advocate for a strong defence industry, without which we could not have supplied Ukraine with the means to defend its freedom.
“Defence businesses large and small have told me that ESG rules have undermined them, from facing more expensive finance to being denied basic banking facilities.
“We are currently investigating the extent of this challenge but I am clear that a strong defence industry supports well-paid jobs around the UK, and enables our Armed Forces to keep us safe.”
Mr Cartlidge is in talks with ADS, the trade body representing 1,200 firms in the aerospace, security, defence and space sectors, to discuss how the Government can end the practice.
Smaller defence businesses have been refused accounts, or told existing accounts will be closed and their balance refunded. They have also been refused insurance, while larger firms struggle to raise capital.
Research from ADS found the proportion of investment funds that exclude the defence sector on ethical grounds has risen from 59 per cent in 2021 to 91 per cent this year.
An ADS spokesperson said: “The aerospace and defence sectors have already seen reduced access to investment and financial services, due to investor concerns about ESG performance or other reputational risks.
“Our small and medium-sized enterprises are facing unprecedented barriers in accessing the finance they need.
“This can range from high-value investment rounds, down to difficulties faced accessing basic business banking services due to overzealous interpretation of risks from banks.
“For many funds, defence stocks have overtaken tobacco as less desirable, despite the vital role defence plays.”
Today the CEO of one £50million defence and security firm told how they had struggled to find banking when their business grew.
They said: “We’d been with one bank, HSBC, from the beginning. But we have expanded and decided to see whether other banks could service us better or allow us to put our eggs in more than one basket.
“My treasurer, an ex-investment banker, wrote to 50 banks. Only Barclays and NatWest said they’d be happy to have a chat.
“The other 48 said they weren’t even interested in having a conversation. It’s obvious to me that the reason is that we inhabit the security and defence sector.”
Labour Shadow Defence Minister Chris Evans demanded a rethink by banks, saying: “Banks are in enough trouble at the moment – the last thing they should be doing is putting the successful defence industry at a disadvantage by refusing to work with them.
“The industry is at the cutting edge of technology and provides thousands of high-quality jobs. The banks need to pull their fingers out and start supporting them.”
Tina McKenzie, policy chair at the Federation of Small Businesses, said: “Excluding small defence firms from access to finance is surely not a desired outcome of good-faith ethical policies.”
Professor John Bryson, of Birmingham University, said: “If the sector is undermined, the Government would be reliant on defence products produced by firms located in very unregulated countries.”
A spokesperson for UK Finance, the trade body for financial service providers, said: “Banks consider a number of factors in deciding whether to provide services to companies in the defence sector.
“These include ensuring compliance with any applicable laws and regulations, as well as a firm’s own risk management.
“Various firms have statements on their websites setting out their approach in terms of the defence sector, including what levels of due diligence are required.”
