Councils are flying flags for Ukraine from their town halls while blocking investment in the British defence industry.

At least a dozen English councils have passed motions “divesting” from defence companies because of the war in Gaza, or taken steps to reduce their holdings in arms companies.

A new report by two Labour MPs found that defence companies have missed out on at least £30 million in investment because of action taken by local councils to focus their pension funds on “ethical” firms.

It comes despite the fact that several of the councils have displayed the Ukrainian flag from their town halls in solidarity against Russia.

The MPs, Luke Charters and Alex Baker, said there was “untapped potential” in local government pensions that could be used to boost investment in the defence sector, which often struggles to access finance.

They argued that supporting British defence companies would help Ukraine, which has received more than £18 billion in military and humanitarian support from the UK.

The MPs said there was a “concerning trend among UK councils to divest from defence, with at least a dozen authorities implementing partial or full exclusion policies since 2022”.

The MPs did not name the councils, but The Telegraph has found evidence of town halls in London, Bristol, Somerset, Oxford and Dudley where motions have been passed banning defence investment in support of Palestine.

Dudley Council, which is under no single party’s overall control, passed a motion to divest from defence companies with the support of Labour and Liberal Democrat councillors.

The council has flown the Ukrainian flag several times since the Russian invasion in February 2022, and lit up its town hall in blue and yellow.