Open letter to index providers on controversial weapons

More than 140 financial institutions called on major index providers to exclude producers of controversial weapons from their mainstream index products. The initiative, coordinated by Swiss Sustainable Finance (SSF), was published as an open letter in the Financial Times and two Swiss newspapers in February 2019.

In the open letter, the co-signatories argue that many investors are not able to invest in controversial weapons free options or are unaware of the fact that major indices include producers of controversial weapons. As a result, those investors are “contributing to the financing of companies involved in controversial weapons”. The co-signatories therefore ask index providers to exclude such producers from their mainstream indices, rather than just offering special controversial weapons free or ESG options.

The new normal

The response from the index providers ignored that ask however, as many providers referred to dedicated ESG products as an option for investors who don’t want to invest in controversial weapon producers. S&P Dow Jones Indices, for example, was quoted sayingTo accommodate the diversity of investor viewpoints and objectives, we currently offer, for example, a spectrum of indices based on environmental, social and governance (ESG) indices for investors who seek to decrease their exposures to or exclude certain companies or sectors from their investments.

But as the open letter explained, exclusionary screening of such producers has become the norm rather than the exception and should be the default option in index products as well. “Anyone who does still wish to invest in controversial weapons would still be free to use a specialist index, or invest directly.”

Above everything else, the call, which by September 2019 had attracted 172 signatories, shows how the norm to exclude companies involved in controversial weapons has been firmly established. It has become something the largest mainstream financial institution find to be common sense.

Nuclear weapons controversial

There was some disagreement among the signatories about the definition of controversial weapons, however. The background document on that question prepared by SSF argues it usually includes one or more of 3 characteristics: a weapons is of an indiscriminate nature; a weapons causes disproportionate harm; or a weapon is prohibited by an international legal instrument. These characteristics follow from key principles of International Humanitarian Law, which governs the use of force during armed conflict and among other things requires actors to distinguish between military and civilian targets, to protect those hors de combat, to only use proportional force that is necessary to achieve a specific military objective and to not inflict unnecessary suffering. Weapons generally considered to be controversial are anti-personnel landmines, cluster munitions, biological weapons, chemical weapons and nuclear weapons.

Nuclear weapons clearly meet all three characteristics: it is the most indiscriminate weapon ever invented and causes unimaginable humanitarian harm, not just at the time of use but also for future generation. For the vast majority of states, using nuclear weapons is prohibited by the Nuclear Non-Proliferation Treaty, and for the 5 states recognized as possessing nuclear weapons by that Treaty, there is a legally binding obligation to disarm their arsenals. In addition, the new Treaty on the Prohibition of Nuclear Weapons, adopted in 2017 in the UN by 122 states, comprehensively prohibits the production, development and use of nuclear weapons. The Treaty will enter into force after 50 states ratify it, a goal that is getting closer rapidly as 26 states have already ratified and a further 44 states have signed the Treaty.

Still, the SSF initiative only considers nuclear weapons controversial “for countries that have not signed the 1970 Treaty on the Non-Proliferation of Nuclear Weapons”. This means that the 172 signatories of the SSF initiative are really saying that it’s just the nuclear weapons of India, Israel, North-Korea and Pakistan that are controversial, and that the 14000 nuclear weapons of Russia and the US are perfectly fine. This is hard to explain to the average pension fund client, and even harder to explain to the survivors of the use of nuclear weapons in Japan and the nuclear tests in the Pacific, Kazakhstan, Algeria and the United States.

It is also a position that many of the signatories of the SSF open letter do not support either. Don’t Bank on the Bomb research shows that more than 10 of the signatories have investment policies in place that restrict investments in all nuclear weapon producers, without exception for the country of origin or operation of producers. And the International Committee of the Red Cross, whose Swiss pension fund Caisse de Pension du Comité International de la Croix-Rouge has also signed the SSF letter, actively advocates for the abolition of all nuclear weapons.

It seems likely that a handful of investors have compelled the group to exclude the vast majority of the world’s nuclear arsenals from the SSF initiative. It is notable that some of these very same institutions are now using the SSF initiative as an excuse to not comprehensively exclude nuclear weapon producers from index-linked investments themselves.

Losing battle

There is only a handful of states that are clinging to nuclear weapons in a misguided and toxic sense of what security means, and they are losing the battle of global public opinion. Countries and citizens around the world demand the end to all nuclear weapons and no longer accept the bullying and threatening with big buttons and fire and fury. The few financial institutions that continue to hide behind the NPT face the same overwhelming rejection of nuclear weapons by their customers. And in the long term, index providers will not be able to ignore the demands of the financial sector for mainstream index products without controversial weapons.