Managing Portfolio Exposure to Firearms: What investor can do

UPDATED: 6 APRIL, 2018

The February 14 mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida and the subsequent student protests and activism have reignited America’s debate over gun safety. Interestingly, the conversation has shifted to public pension investment in the firearms industry. As passive investors take a closer look at their holdings, some are asking what steps they can take to reduce their exposure firearms manufacturers and retailers.

According to Gun Violence Archive, there have been at least 239 school shootings in the US since the Sandy Hook Elementary School shooting in Newtown, Connecticut in 2012, in which 20 children and six adults were killed. Of the 239 shootings, 15 can be classified as mass shootings, events in which four or more people are shot.

What can concerned investors do?

Public pension investments in gun companies can, in part, be attributed to passive strategies. These passive strategies are index-based investments that replicate the holdings of particular indices in an effort to obtain broad market exposure and keep fees low.

Because of this broad market exposure, passive fund managers are some of the largest investors in the three major publicly traded gun makers. Considering this significant level of investment, firms like Blackrock and Vanguard have an opportunity to meaningfully shift the way investors invest in and engage with gun companies.

Many passive fund managers state that they don’t have control over which companies are included in the indices their strategies track because third-party providers decide index constituents. While this may be the case, there are ways passive fund managers, and all asset managers, can and have been responding to public pressure around this issue.

Exclusionary Screening

Fund managers can offer their clients solutions that exclude investments in companies that manufacture, distribute, or sell firearms. Before the 2012 Sandy Hook Elementary school shooting, the amount of institutional assets invested in portfolios that excluded gun companies was approximately $74 billion. By 2016, the amount of assets flowing out of strategies that include gun companies increased to $845 billion according to the Forum for Sustainable and Responsible Investment.

Sustainalytics supports asset managers in creating and offering strategies that exclude gun manufacturers. Screening criteria may incorporate various dimensions of a company’s involvement:

Type of Involvement: The firearms products that have generated the greatest concern and risk are assault weapons manufactured for the civilian market and ammunition for such weapons. Screening criteria may be general or may focus on the manufacturers of specific products of concern. Criteria may also distinguish between the manufacturing and retailing of firearms. For example, an investor could decide to place all companies with direct involvement in the manufacturing of firearms on an exclusion list, but allow investment in retailers that sell firearms.

Level of Involvement: The percentage of annual revenues that a company derives from firearms can also be incorporated into screening criteria. For example, a revenue threshold screen could stipulate that a company involved in the manufacture of firearms must not obtain more than 5 per cent of its revenue from such activities, or that a retailer of firearms must not earn more than 10 per cent of its revenue from such activity.

[Editorial note: On April 5, Blackrock announced the creation of two new exchange-traded funds and new index-tracking products for pension and employee retirement plans that exclude stocks of gun manufacturers and retailers. Blackrock noted that it introduced the changes “to provide more choice for clients seeking to exclude firearms companies from their portfolios.”]

Company Engagement

Avoiding ownership isn’t the only approach investors can take. Those in favor of company engagement argue that when investors choose to divest, they forego the opportunity to meet with companies and encourage the pursuit of better practices. Some potential areas of engagement for gun makers and retailers include:

• Using their lobbying power to contribute to the gun safety discussion
• Raising the minimum age to buy guns to 21
• Considering the discontinuation of certain types of guns, ammunition and accessories
• Discussing the implementation of heightened requirements around gun safety protocols and background checks
• Examining the sale of safety devices and smart-gun technology

At the beginning of March, Blackrock announced that it would speak with weapons manufacturers and distributors to understand their response to the Parkland, Florida shooting and broader gun safety debate. The firm is also responding by educating its clients about and directing them to Blackrock products that exclude firearms manufacturers and/or retailers.

If gun manufacturers push back against engagement efforts, investors can consider filing shareholder resolutions to request that companies disclose on what they are doing to further gun safety. This will, at the very least, send a strong signal to companies and continue the conversation.

In fact, companies are already responding and making decisions to limit sales of firearms. Dick’s Sporting Goods, Wal-Mart and Kroger have all announced that they will not sell guns to anyone under 21 years of age. Wal-Mart stated it would no longer sell items resembling assault-style rifles, including toys and air guns. Dick’s said it was immediately ending sales of all assault-style rifles in its stores and would no longer sell high-capacity magazines.

Some companies are also cutting ties with the National Rifle Association (NRA) by discontinuing their discount programs for NRA members. MetLife is dropping its program of offering discounts on home and auto insurance. Chubb Ltd. announced that it would pull out of an NRA-linked program to offer firearms liability insurance. In anticipation of investor engagement and pressure around these issues, companies are pre-emptively and proactively trying to manage reputational risk that might stem from the continued sale of firearms.

It appears we’ve reached a tipping point that has stemmed from public pressure on institutional investors to respond to the firearms industry. What remains to be seen is whether this momentum will build to facilitate meaningful change, or if, as the media attention fades, company and investor efforts will fade as well.

Sustainalytics supports investors who wish to exclude specific product areas from their portfolios. Please Get in Touch to speak with one of our advisers or visit the Screening Support Services page on our website.