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26 Jan 2021

Mary Beth Gallagher, Executive Director & Jillianne Lyon, Program Associate, Investor Advocates for Social Justice

3 things investors should consider as the nuclear weapon ban comes into effect

ICAN protestors outside Australia's permanent mission to the UN at Geneva, 2016

1. What is the Treaty and why it is relevant to investors

After years of negotiations and increasing calls for nuclear disarmament, the Treaty on the Prohibition of Nuclear Weapons (TPNW) finally entered into force on January 22, 2021. This legally binding treaty prohibits the development, testing, production, possession, use and sale of nuclear weapons. The United States and the world’s eight other nuclear-armed countries (UK, Russia, France, China, India, Pakistan, Israel and North Korea) voted against the Treaty’s adoption in 2017 and have not ratified it. Although the TPNW is not binding on the nations that refuse to ratify, this milestone increases pressure and, crucially, shifts international norms.

Nuclear weapons are weapons of mass destruction, indiscriminate by nature. Their impacts cannot be contained within national borders and they cause massive death and destruction, large-scale displacement, and long-term harm to human health, well-being, the environment, economy and social order. Geopolitical uncertainty and erosion of several arms control treaties leaves the world at its highest ever vulnerability to a nuclear weapons catastrophe, despite the fact they are now explicitly illegal under international law.

Diversified investors are often exposed to companies that produce, manufacture or finance some of the most harmful weapons and technologies, while companies and their investors profit from war. But they are also perfectly positioned to help realize the central spirit and ethos of the TPNW.

2. How your investments may be impacted by the nuclear weapons ban

A recent report identified $116bn in current contracts between governments and the private sector to design, manufacture and maintain nuclear weapons, incentivizing companies to lobby governments to expand nuclear stockpiles. Profitable US Government contracts for manufacturing nuclear weapons have gone to large publicly-owned companies like Boeing, General Dynamics, Honeywell, Lockheed Martin and Northrop Grumman. But now the TPNW has entered into force, there is an onus on these companies connected to nuclear weapons to demonstrate they are not assisting in prohibited activities in jurisdictions that ratified the Treaty.

Although states have the duty to protect human rights, this does not absolve companies of responsibility for the impacts of the end use of their products. The UN Guiding Principles on Business and Human Rights outline the responsibilities of companies for human rights impacts they may cause, contribute, or be directly linked to. Companies that profit from and finance this industry, regardless of how small their involvement, have a responsibility to identify, prevent, mitigate and account for the actual and potential adverse human rights impacts given the scale, scope and irremediability of the potential harm.

3. What is the role of an investor related to the nuclear weapons ban

Just as for all businesses, investors have a responsibility to respect human rights. To meet this responsibility as it relates to nuclear weapons, many investors have historically prohibited investing in nuclear weapons in their investment guidelines. In a welcome move, nearly 100 financial institutions have ended their relationship with the nuclear weapons industry since the UN voted to adopt the TPNW in 2017. Financial institutions in ratifying states, recognizing the normative shift, will likely take the necessary steps to end investments in nuclear weapons.

Beyond the list of weapons producers, investors may be shareholders in other companies that support the industry’s growth, such as banks. For example, 325 financial institutions reportedly invested $748 billion in the top nuclear weapons manufacturers between January 2017 and January 2019. Investors should assess their direct and indirect exposure to nuclear weapons, and those that are exposed have a responsibility to conduct robust human rights due diligence and exercise their leverage to prevent and mitigate human rights risks. Divestment from the industry, calls on banks to reassess their lending, active ownership and engagement, as well as proxy voting, are strategies investors can exercise to meet their human rights responsibilities.

Faith-based institutions have long called for nuclear disarmament through protest and their investment stewardship. Faith-based institutional investors that maintain a small exposure to the companies that enables them to engage, call on companies to address the catastrophic human rights impacts associated with nuclear weapons. Investors ask for disclosure on policies and practices to conduct risk assessments, challenge a company on how it can maintain and possibly fulfil its “human rights policy” while making nuclear weapons, and whether there are government contracts a company simply should not pursue due to the potential for irreparable harm at massive scale from the end use of its products.

In light of these legal, financial, reputational, and human rights risks, this proxy season, faith-based investors filed shareholder proposals with Lockheed Martin and Northrop Grumman. Proposals filed with General Dynamics and Raytheon Technologies will not be on the proxy, although shareholder dialogue will continue. PNC Financial Services, as a financier of nuclear weapons, will face a proxy vote this spring requesting a report on the effectiveness of its risk management systems at addressing the human rights and financial risks associated with its ties to nuclear weapons.

Companies continue to profit from nuclear weapons contracts, all while increasing severe risks to human rights and the global community. As the groundbreaking Treaty on the Prohibition of Nuclear Weapons enters into force, investors have a responsibility to factor the risks of nuclear weapons into investment decisions and hold companies and themselves accountable.