In a written ministerial statement on Tuesday (12 September), the secretary said defence companies are being excluded from access to debt and equity capital, citing ESG grounds.
"This not only threatens an important part of the economy that, through Ministry of Defence expenditure alone, directly and indirectly supports over 200,000 jobs, but it fails to recognise that the UK's defence industry is essential to protecting our way of life," he said.
Shapps said there was "nothing contradictory between the principles within ESG and the defence industry", noting that the UK defence sector has reflected ESG considerations "in a range of ways".
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"Industry is driving innovation in new technologies to improve sustainability and companies are embedding ESG metrics into their remuneration structures," he said.
"Additionally, defence companies are exploring how to raise standards across the board, improve access to information and communicate the positive vision of what they are achieving on these subjects."
Earlier this year, the Treasury published a consultation on a potential regulatory framework for ESG ratings providers, with the aim of improving transparency and promoting good conduct in the ESG ratings business.
In his statement, Shapps urged ESG ratings providers to be clearer on their methodology and more "prompt to correct errors when these are pointed out".
The defence secretary also said that, alongside the Treasury minister Andrew Griffith, he will continue to engage with defence companies and the financial sector on access to investment and financial services for industries "critical to our national security".
"This government believes that the important values within ESG should not undermine capabilities developed to help us preserve peace and security, without which sustaining those values would not be possible," he added.
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Paul Jourdan, CEO of Amati Global Investors, echoed Shapps' views in an essay published today (14 September), in which he said it was "essential" for the defence sector to remain part of the investable universe.
"We recognise that there are many pitfalls to negotiate in investing in this sector, and that analysis of the risks around corruption can be difficult, not least as defence companies are required to keep many aspects of their business secret," he said.
"However, given the strategic imperative for Western nations to have well equipped military services, it is essential for this sector to remain part of the investable universe; far from being ethical to exclude it wholesale, we would argue that it is deeply unethical to do so."