Defence sector – tackling the barriers to securing finance – EU and UK

Tackling the barriers to defence finance

Although there are clear national priorities to direct private finance to defence and defence-related investments and there have been many conversations about how to apply sustainable finance to the defence industry, there seems to have been far fewer conversations about the existing structural and market barriers to investment in the defence sector. As we will discuss further below, to unlock capital for defence these barriers need to be addressed and unlocked.

A good summary of these barriers was given in the recent UK Parliament discussion on ESG and Defence. In the discussion, MPs expressed strong support for investment in defence assets across the spectrum, identifying businesses in their own constituencies which are part of the defence supply chain, but they also identified a number of specific barriers to investment, including:

• Artificial distinctions being drawn between dual-use military technology and single use military equipment, recognising that banks and lenders need to be more sophisticated and nuanced in their analysis of what defence companies do. An example was given that the company which makes the insulation for military helicopters (which support humanitarian missions all over the world) finds it difficult to find banking, insurance and financing regardless of the purpose of the product and the fact that business itself does not make bombs or ordinances. A second example noted that the 1500 companies within the supply chain for Trident were unable to find financing due to their link to nuclear weapons.
• Deeper more systemic problems which outweigh the application of the ESG or sustainable finance framework, such as deep, persistent problems “across access to capital, commercial lending risk, cash-flow pressures, contracting structures and compliance complexity”. These issues arise not because of the individual risk or responsibility of the actors but instead due to systemic “issues in ecosystem defined by long payment cycles, sometimes single dominant customers like the primes, uncertain procurement pipelines and fragmented support across Government.” This is a matter of how lenders perceive the risk in the sector.

To increase banking availability, finance and insurance to the sector, these barriers need to be tackled jointly by government, the market and financial institutions to gain a nuanced understanding of how to support defence sector investments.

Is lack of data transparency a barrier?

In addition to the structural and market barriers identified above, increasingly finance requires transparency. Many entities, including banks, insurers and investment funds are in scope of sustainability reporting in the UK, EU and other jurisdictions.

In order to disclose under laws such as the EU Corporate Sustainability Reporting Directive (“CSRD”) and the Taskforce on Climate-related Financial Disclosures, reporters need to collect data from their supply chains including borrowers, covering greenhouse gas emissions. Currently national military emissions reporting is not mandatory under the UN FCC’s requirements for Nationally Determined Contributions¹ but military operations themselves have a high carbon footprint. This lack of transparency is a potential barrier to finance generally given the reporting requirements of financial institutions but it is an even higher barrier to sustainable finance and this is before considering the data required to analyse the social and ethical aspects of a defence investment for sustainable finance purposes.

To address this, ADS, the UK trade association for aerospace, defence, security and space, has launched The UK Defence ESG Charter with leading industry members. One of the environmental commitments includes decarbonising the supply chain and the Charter introduces a number of key performance indicators which may assist in the application of sustainable finance framework disclosure requirements.

Guidance from the European Commission on applying the sustainable finance framework to the defence sector

As we mentioned above, on 30 December 2025, the European Commission published its final Notice on the application of the sustainable finance framework and the Corporate Sustainability Due Diligence Directive to the defence sector (the “Notice”) in the Official Journal.

The Notice makes it clear that the EU sustainable finance framework “is compatible with investing in the defence sector, and that sustainability disclosures apply horizontally across all industries”. In addition, it gives specific guidance about how to apply the CSRD, the Sustainable Finance Disclosure Regulation (the “SFDR”) and EU Taxonomy to the defence sector. For more detail see our previous briefing here but, in summary, the Commission focuses on particular concepts such as principal adverse impact (PAI) indicators, the Do No Significant Harm test and minimum safeguards and gives helpful pointers as to determinations which may be made in relation to defence investments.

It is clear that the Commission does not set any limitations on the financing of any sector. Recognising the spectrum of defence assets that exist: from resilient infrastructure to dual-use technology to specific military equipment and weapons, the Notice indicates that defence sector investments are to be assessed on a case-by-case basis.

A final thought…seizing the opportunity

According to the BBC, the UK Ministry of Defence believes that £28 billion of investment over the next four years is needed to bridge the gap between our current resources and our defence ambitions. How this gap will be met is the topic of the delayed UK Defence Investment Plan. This creates significant opportunity for investment in the UK.

This opportunity need not be solely for defence, history has shown that defence research could have significant spillover into the rest of society. For example, in a UK Parliament discussion on ESG and Defence, one MP highlighted the significant proportion of US GDP growth comes from the Defence Advanced Research Projects Agency (“DARPA”) investments of the 1980s, which underpinned technological inventions such as the internet, the smartphone and many other underlying innovations. It seems to us that seizing the opportunity to invest in new technologies which could change the future and also be used to solve some of the pressing problems of today (defence, climate, nature, cybersecurity) would achieve a number of the UK’s strategic goals.

As with any evolving area of investment, however, care will be needed. Investments in defence and related industries involve multiple additional risks and regulatory hurdles which are specific to those markets and which need to be considered alongside the potential opportunities. Hogan Lovells specialists are well-versed in managing these specific risks and opportunities.

Please contact any of the authors of this article or your usual Hogan Lovells contact if you would like to discuss any of the issues raised in this article.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Emily Julier, Rita Hunter and Malcolm Parry.