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Ethical investors block bid for nuclear weapons contracts

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The rise of so-called ethical investing has forced the outsourcer Serco to pull out of bidding to help manage Britain's nuclear weapons arsenal, leaving the Ministry of Defence reliant on fewer potential partners for the critical work.

The FTSE 250 company has abandoned plans to compete for contracts with the Atomic Weapons Establishment, which designs, makes and maintains warheads, City sources revealed.

The decision follows warnings from fund managers that working with nuclear weapons might force them to dump Serco shares due to non-compliance with Environmental, Social and Governance (ESG) standards.

ESG has emerged in recent years as an increasingly powerful force. It means companies are assessed by investors not only on their financial performance but also more subjective measures of their impact on the wider world.

Serco executives argued that investing in a contractor for the Atomic Weapons Establishment was ethically no different to owning UK sovereign debt, as both are a function of a democratically elected Government. Fund managers rejected that line of reasoning, however.

It leaves defence chiefs with fewer options as they seek to restructure the management of Britain’s nuclear stockpile.

Another potential bidder, a joint venture between Serco rivals Mitie and Jacobs, is also understood to have held talks about whether to pursue contracts with the Atomic Weapons Establishment.

The basis of the doubts is unclear and no decisions have been taken. Nuclear weapons work is up for grabs after the Atomic Weapons Establishment was renationalised earlier this year.

The organisation was previously operated by a consortium of Lockheed Martin, Serco and Mitie. The Defence Secretary Ben Wallace brought it back into public hands after a National Audit Office investigation described it as “monopolistic” and warned that the cost of warheads for the fleet of Trident submarines had spiralled by £1.4bn amid lengthy delays.

The withdrawal of Serco is one of the clearest signs yet that outsourcers are being forced to take a more cautious approach to Government work due to ESG.

It threatens to further squeeze taxpayers, who are required to depend on a pool of companies, some of which are financially stretched due to low-margin contracts.

Capita’s Chief Executive John Lewis has said that the company had turned down work with a foreign government over concerns around human rights abuses.

Leading firms have also registered their concern that the Government is itself adopting ESG ideas in procurement. One senior industry figure said there was “too much focus” on the environment and social impact of outsourcers compared with how well they were able to do a job.

As part of a shake-up of procurement rules launched last year, more weight was given during decisions to the “wider social value” of a contract award. It has meant more contacts only attract one bidder, according to industry sources, the Cabinet Office minister Lord Agnew has championed the use of social value in procurement.

He has encouraged civil servants to reward firms creating new jobs, tackling climate change and reducing waste when awarding Government contracts. Serco, Mitie and Jacobs declined to comment.

The Ministry of Defence declined to comment on what it said were commercially sensitive matters.