Stockholm (NordSIP) – As the Swedish flag was finally hoisted at NATO’s European Headquarters, with yet no end in sight for the Russian invasion of Ukraine, the treatment the weapons industry by sustainable investors remains a topic of controversy. A recent report by the Global Alliance for Banking on Values (GABV) argues uncompromisingly against the inclusion of weapons within sustainable portfolios and provides some guidance on how such exclusions or engagement could be conducted.
Weapons are Not Sustainable Investments
Shortly after Russia’s invasion of Ukraine, pressure started mounting for weapons to be taken off sustainable investing blacklists. At the time, NordSIP noted the argument made the proponents of such a view: “What could be more sustainable than investing in the defence of the democratic institutions and sovereignty that allow us to pursue all our other goals?”
It is understandable that investments in armament, undesirable though they might be, have their place in the portfolio of some investors, especially in the context of funding the defence industry necessary to ensure the safety of any country. At a time of increasing polarisation, authoritarianism and geopolitical uncertainty, the appeal of these investments is undeniable. However, such investments do not have to be conducted under the aegis of pursuing sustainability.
In its statement, released at the conclusion of its 2024 Annual Meeting in Milan, on 28 February 2024, GABV echoed this sentiment, noting that “the financing of weapons and arms does not qualify for, and is at odds with, any definition of sustainable finance. The GABV takes a humanitarian view and strongly condemns any type of violence, fighting or war, under any circumstances, wherever it occurs. Lasting conflict resolution can only take place through open dialogue, peaceful negotiations and sincere collaboration as a means to build the trust that underpins peace.” [emphasis added]
Finance for Peace
More importantly, by taking a proactive role in rejecting investments in the global weapons industry, it can be argued that the financial industry could facilitate a financial environment detrimental to the production of armament, complicating the life of global aggressors and playing a crucial role in stopping the spread of conflicts.
There is much that sustainable investors can do to support peace. A recent publication by GABV, “Finance for War. Finance for Peace.” considers how values-based banks foster peace in a world of increasing conflict. There are various ways to exclude weapons from investments, such as not investing in companies involved with so-called ‘controversial’ weapons, such as anti-personnel mines, cluster bombs, chemical and biological weapons and nuclear weapons, depleted uranium weapons and white phosphorus.
According to the GABV report, “the number of mainstream investors divesting from nuclear weapons is, however, growing: for example the insurance company Storebrand in Norway, Svenska Handelsbanken in Sweden, and the Norwegian Pension Fund, the largest sovereign wealth fund in the world, with €1.2 trillion invested.”
Some investors can go a step further and exclude all companies producing military equipment and services, which covers not just weapons and military supplies but also equipment that can be used for military purposes, including software used by armies. “Some investment companies, particularly those owned by values-based banks generally exclude all types of weapons and weapon systems regardless of turnover thresholds. Values-based banks exclude weapons from their lending and investment activities.”
How to Exclude Weapons
The report also includes a survey of how GABV’s 71 members exclude weapons from their banking and financial operations, conducted between December 2023 and February 2024. The survey showed that 73% of GABV members (52 out of 71) have an explicit exclusion policy for investment or lending in the production or trade in the arms industry. “The geographic areas in which most GABV members (over 80%) have an exclusion policy regarding weapons are Europe (90%), Asia-Pacific (83%), Latin America (82%) and Africa (80%). North America is the only region where the percentage of members who have an exclusion policy is lower than 80% (35%),” GABV explains.
The report provides 18 case studies of how GABV members are excluding the defence industry, including Denmark’s Merkur and the Netherlands’ Triodos Bank. “Merkur applies comprehensive selection criteria and minimum requirements to ensure that not only the bank’s activities do no harm, but they also lead to positive changes for people, the climate, the environment and biodiversity. Merkur’s minimum criteria exclude customers who produce or sell weapons, weapon parts or weapons-related services. Through its main investment partners (Triodos Investment Management and SDG Invest), Merkur maintains a zero-tolerance policy towards companies involved in the production or distribution of weapons, as well as related services,” the report recounts.
The Weapons Industry is (Too) Well Financed
These efforts are important because the task ahead is arduous. Shedding light on the financing of the weapons industry, the GABV report argues that the industry is too well financed. According to the report, during 2020-2022, financial institutions supported the defence industry with more than US$959 billion through different forms of financing: loans (19%), bondholding (1%), shareholding (69%) and underwriting (11%).
Unsurprisingly, the leading financiers of the armament industry are large general asset managers, such as Vanguard, State Street, BlackRock, Capital Group, BNP Paribas, Deutsche Bank, UBS, Barclays, Santander, or Mizuho, among many others. According to a report by the NGO PAX14, the 15 largest banks in Europe invest (through loans and underwritings) in arms companies that sell weapons to states involved in human rights violations or armed conflict. The total invested amount is €87.72bn
