Increased Awareness about the Social and Environmental Impacts of Investments
Banks and other financial institutions are becoming increasingly aware of the social and environmental impacts of their investment decisions. Simon O’Connor, an economic adviser to the Australian Conservation Foundation, explains why they should rule out financing nuclear arms.
ICAN: Why should financial institutions be concerned about nuclear weapons?
Simon O’Connor (SO): There is a distinct risk to the reputation of financial institutions that invest in or loan money to companies involved in the nuclear weapons supply chain. They are implicitly supporting nuclear weapons whether they intend it or not. Beyond supporting an industry that goes against ethical norms for most people, the nuclear weapons industry itself holds unique and severe risks, such as the risks of containment breaches of dangerous radioactive materials in the manufacturing process.
Financiers are exposed to all of these risks through association. In light of the increased sensitivity and sophistication of informed investors, including the strong trend towards ethical and responsible investing, financial institutions should be staying clear of these companies.
ICAN: What ethical codes can financial institutions subscribe to?
SO: There are now numerous international codes that can be interpreted to have implications for companies investing in nuclear weapons, such as the UN Global Compact, OECD Guidelines for Multinational Enterprises and the Equator Principles. Although none of these explicitly exclude investments in nuclear weapons, many signatories are interpreting them as such.
The UN Principles for Responsible Investment commit investors to consider the environmental, social and corporate governance risks inherent in the companies in which they invest. This code has been strongly supported by the world’s largest financial institutions, particularly pension funds, as part of a movement towards more active and responsible share ownership.
Although not excluding investments in nuclear weapons, the UN investment principles do require active engagement with companies owned by investors, resulting in many investors pressuring companies to mitigate risks and improve business performance.
ICAN: Have most financial institutions adopted policies on nuclear weapons?
SO: From my experience, only a minority of financial institutions have adopted policies that explicitly exclude nuclear weapons from investment or lending mandates. These are usually very active funds, including ethical investment funds, which often have their own voluntary ethical code explicitly excluding investments in nuclear weapons.
Nevertheless, some of the world’s largest financial companies have declared they will not invest in nuclear weapons companies, indicating two important points: that support for the manufacture of nuclear weapons is unacceptable to many of the largest and most conservative companies across the globe, and that financial returns need not suffer by not doing business with nuclear weapons companies.
ICAN: What if banks provide loans for “general corporate purposes” only?
SO: From the perspective of the average person on the street, there is little distinction between doing a lot of business with a nuclear weapons company and only a little bit of business. This is a question of the degree of involvement in the actual manufacture of nuclear weapons that financial institutions are willing to accept, and appears to be somewhat arbitrary when looking at the research results presented in this report.
A “general corporate loan” to a nuclear weapons company supports that company to continue doing its weapons manufacturing, whether directly or indirectly, in the same way that exporting uranium to a country for nuclear power frees up other uranium supplies for use in a weapons programme.
ICAN: What if nuclear weapons are only a small part of a company’s work?
SO: Many financial institutions will set a materiality threshold to define whether a company is substantially involved in nuclear weapons or not, such as 5 per cent of revenues being earned through the weapons business. Where a company’s weapons business is below the threshold, a financial institution may deem that the weapons component of the business is “immaterial”.
This makes some sense only from a theoretical perspective. However, when considered from an ethical perspective, there is no level of involvement in nuclear weapons that is “immaterial”, which is why ethical investors will exclude investment in these companies no matter how small a part of the overall enterprise.
ICAN: Can shareholders influence nuclear weapons companies?
SO: Shareholders have a critical role to play in directing the activities of the companies in which they invest. Whether that be on issues such as the appropriate remuneration of executives or involvement in nuclear weapons, shareholders need to be aware of the activities their investments are supporting and work to change those companies.
Boards of companies are there to act in the interests of shareholders – the ultimate owners of the company – so the message that manufacture of nuclear weapons is not acceptable needs to be made loud and clear to those boards.
ICAN: What practical effect can nuclear weapons divestment have?
SO: Divestment sends the strongest signal that the activities of a company are not acceptable. Although it is rare that a share price will be materially impacted upon by a divestment decision of a single investor, the divestment can send a strong signal to the board of the company that its activities will not be tolerated, and can catalyse change within the business. It also sends a strong signal to other investors that the company is engaged in activities that are unacceptable.