Nuclear Weapons: The Next “No-Go” Area for Investors?

The start of 2018 brought two interesting developments to the responsible investing community. On January 11th, the Dutch 405 billion euro pension fund ABP announced that it will take steps to exclude nuclear weapons and tobacco companies from its investments. Within a week, Norges Bank declared the addition of five companies to the 870 billion euro Government Pension Fund Global exclusion list due to involvement with nuclear weapons.

While nuclear weapons have been on the agenda of responsible investors for many years, recently, an increasing number of investors have added nuclear weapons to their exclusion policies. The news of ongoing tension among nuclear power states and increasing international legislation on the topic, signal a potential acceleration of nuclear weapons as a no-go area for investors.

The context

To better understand the changing role of nuclear weapons in relation to responsible investing, it is important to examine the wider political and societal context.

The international community has attempted to regulate nuclear weapons since the 1970s. The Non-Proliferation of Nuclear Weapons Treaty (NPT), the first of its kind, has the main objective to prevent the spread of nuclear weapons and weapons technology. There are five NPT-designated nuclear weapon states: China, France, Russia, United Kingdom and United States. One hundred ninety-one countries have joined the Treaty constituting the majority of countries in the world with the exception of India, Israel, Pakistan and South Sudan. While India and Pakistan have publicly disclosed their nuclear weapon programs, Israel is believed to possess nuclear weapons, but has a policy that neither confirms nor denies this. In 2003, North Korea, who is believed to have nuclear weapon capabilities, withdrew from the Treaty.

Amidst the discussions on nuclear weapon programs from the abovementioned nuclear states, less attention has been paid to the five Treaties on regional Nuclear-Weapon-Free Zones. These Treaties cover Latin America and the Caribbean, the South Pacific, Southeast Asia, Africa and Central Asia. In these zones, countries commit themselves not to manufacture, acquire, test, or possess nuclear weapons. With more than 110 countries belonging to the zones, large parts of the world have already banned nuclear weapons.

Next to these international standards, it is important to highlight that several countries have developed national legislation against the financing of nuclear weapons. For example, New Zealand’s “Nuclear Free Zone, Disarmament, and Arms Control Act” makes specific reference to the prohibition of financing companies involved with nuclear explosive devices. In our November 2016 ESG Spotlight report, Exposure to Controversial Weapons: On the KiwiSaver Trail, we covered the substantial reputational and compliance risks investors in such weapon producers face. Switzerland’s “War Materials” act also refers to nuclear weapons but provides limited clarity on the scope of financing.

Recent developments and their impact

For some time, the international and investment communities have been paying attention to nuclear weapons, however, in the past year we have seen several developments expected to bring nuclear weapons to the top of the (responsible) investment community agenda.

The UN Treaty on the Prohibition of Nuclear Weapons was adopted in July 2017 and, to date, 56 countries have signed it, including countries such as Austria, Brazil, Ireland, Mexico, New Zealand and South Africa. The Treaty will enter into force once 50 countries have signed and ratified it. The main purpose of this Treaty is the continuation of nuclear disarmament with the goal to eliminate these weapons. The UN also says “The Convention will give States additional means by which they can disassociate themselves from any activity that supports nuclear weapons.”

Additionally, several organizations with goals ranging from creating awareness and policy development to campaigns on abolishing nuclear weapons and divestment campaigns are pushing the conversation forward. Organizations such as the Nuclear Threat Initiative (NTI) and 2017 Noble Peace Prize winner ICAN have a global reach and work with policymakers to achieve these goals. The PAX Don’t Bank on the Bomb report covers investors’ stakes in nuclear weapon companies and assesses investment policies on these weapons.

All these developments are expected to influence the (responsible) investment community. However, while NGO campaigns help to further stigmatize nuclear weapons as an undesirable product, it is the legal landscape that is expected to fundamentally change the financial industry. It is more than likely that the UN Treaty on the Prohibition of Nuclear Weapons will enter into force in 2018. As seen with other international treaties banning weapons such as landmines and cluster munitions, such a Treaty sets a global standard on the legitimacy and political status of the weapon. For example, when the Oslo Convention on cluster munitions came into force in 2008, after years of increased public and political opposition to these weapons, the financial industry received even more scrutiny for its role as financier.

What can investors do?

Many investors already restrict investments in certain products, whether it’s a tobacco producer or a cluster weapon company. When considering divestment, investors should create a clear policy framework and process. Communication with internal and external stakeholders remains key. An external stakeholder might question why there is still exposure to a certain company, while a portfolio manager may want more background information before stocks are sold.

In the case of nuclear weapons, it is important to define what constitutes a company’s involvement. Nuclear weapon programs are multi-year, multi-billion-dollar projects involving a wide range of activities, which can include R&D, testing, production or life-extension programs. These programs also cover a wide range of products: missiles, launching systems, but also nuclear material such as Tritium. Our Controversial Weapons Radar research identified over 60 companies involved in nuclear weapon programs.

Some investors also make a distinction between nuclear weapon programs that fall within the NPT framework and programs that do not. This is based on the belief that the NPT creates an extra safeguard for nuclear weapon programs of NPT states. As an example, companies active in the Indian or Pakistani nuclear weapon program would be excluded.

Looking ahead

Under the current political landscape and with the growing risk of an actual nuclear conflict, nuclear weapons are back on the radar of the international and investment communities. This, coupled with the awareness that these weapons can have a disproportionate impact on humans and life on earth, is placing nuclear weapon states’ argument that these weapons act as a deterrent under increased scrutiny. Cyber and terrorism threats also increase the risk of a nuclear weapon falling into the wrong hands or being detonated.

The new international legislation on nuclear weapons is expected to further raise discussions on the legitimacy of these weapons. Nuclear weapon states and nuclear weapon producers will be linked to a weapon banned by an internationally accepted framework. Combined with a growing public opinion against nuclear weapons and investors pulling funding from nuclear weapon companies, investors will likely receive more questions from stakeholders on their position as financiers of nuclear weapon companies. For responsible investors, pressure to take a stance on their investments in these weapons will inevitably increase.

Sustainalytics can help investors interested in developing a defense policy as well as understanding their exposure to nuclear- and other controversial weapons. Please Get in Touch if you would like to speak to one of our advisers and visit our Controversial Weapons Radar page.

** Updated December 3, 2019: A reference to the UN Global Compact integrity policy regarding companies involved in nuclear weapons has been removed. The UNGC exclusionary criteria on controversial weapons only applies to anti-personnel landmines and cluster bombs. Please read the UNGC’s updated integrity policy and exclusionary criteria for more information.