The invasion of Ukraine by Russia has given new impetus to discussions about ESG investment strategies with regard to companies involved in the production of weapons. While investors have so far adopted a variety of different exclusion and divestment policies, and not all ESG policies exclude all weapons manufacturers, one of the most common policies is the negative screening (exclusion) of companies involved in the production of specific types of ‘controversial weapons’. In this regard, several applicable laws, regulations and frameworks exist or are currently under discussion, at national, international or EU level. Nevertheless, significant differences exist between controversial weapons exclusion policies and regulations, depending for example on what weapon types are considered to be ‘controversial’, and on what activities are considered to count as an involvement. In this comment, we provide an overview of recent trends in regulations and policies on controversial weapons.

What are controversial weapons?

Even though there is no official definition of “controversial weapons”, investors and stakeholders typically use the term “controversial weapons” to refer to weapons of mass destruction (chemical, biological and nuclear weapons) and certain conventional weapons like cluster munitions, antipersonnel mines, incendiary weapons, and other weapons under stakeholder scrutiny because of their humanitarian impact on civilians, like white phosphorus weapons and depleted uranium weapons. These weapons are collectively referred to as “controversial weapons” because, in particular, they may be considered to be excessively injurious, to have indiscriminate effects or to damage the natural environment.

For this reason, most of these weapons have been specifically banned or regulated under international treaties, including the Biological Weapons Convention (entered into force in 1975), the Incendiary Weapons Protocol (1983), the Chemical Weapons Convention (1997), the Mine Ban Treaty (1999), the Convention on Cluster Munitions (2010) and the Treaty on the Prohibition of Nuclear Weapons (2021). These treaties, with the exception of the Incendiary Weapons Protocol, prohibit the development and production of these weapons, as well as the provision of assistance to their development or production.

Incendiary Weapons Protocol,

The Financing of Controversial Weapons

While none of the mentioned treaties specifically prohibits financial assistance, the prohibition of the provision of assistance has been interpreted by several State Parties as including financial assistance, especially in the context of the implementation of the Mine Ban Treaty and Convention on Cluster Munitions. Therefore, a growing number of countries, mainly in Europe, have approved laws prohibiting the financing of companies involved in controversial weapons, the latest being Italy with law n. 220 of 9 December 2021. The majority of these laws prohibit investments in anti-personnel mines and cluster munitions, but a few countries have laws also prohibiting investments in other types of controversial weapons, such as depleted uranium weapons, nuclear weapons and incendiary weapons (see table below).

controversial weapons, such as depleted uranium weapons, nuclear weapons and incendiary weapons

On a supranational level, there are regulations and frameworks addressing involvement in controversial weapons at the United Nations (UN) and European Union (EU) level. At the UN level, the UN Global Compact, a voluntary initiative designed to promote corporate sustainability, excludes companies which derive revenue from the production, sale and/or transfer of antipersonnel landmines or cluster bombs. At the EU level, we find a number of regulations, already approved or under discussion, which contain negative screening criteria regarding controversial weapons. For example:

  • The 2019 EU Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to disclose how they consider principal adverse impacts of investment decisions on sustainability factors, including investments in companies involved in the manufacture or selling of antipersonnel mines, cluster munitions, chemical weapons and biological weapons.
  • The 2020 Regulation on EU Paris-aligned Benchmarks requires administrators of EU Paris-aligned Benchmarks to exclude “companies involved in any activities related to controversial weapons” “as referred to in international treaties and conventions, United Nations principles and, where applicable, national legislation”.

Among EU proposals currently under discussion are the following:

  • The latest version (4.0) of the draft technical report on the Development of EU Ecolabel criteria for Retail Financial Products, published in March 2021, proposes to exclude companies deriving turnover from the production or trade of controversial weapons covered by the Chemical Weapons Convention, Biological Weapons Convention, Ottawa Convention (Ban on Anti-Personnel Mines), Oslo Convention (Ban on Cluster Munitions) and the Treaty on the Non-Proliferation of Nuclear Weapons (as well as companies deriving more than 5% of turnover from the production or trade of conventional weapons and/or military products used for combat).
  • The Platform on Sustainable Finance’s final report on Social Taxonomy (February 2022) proposes to identify harmful activities by using internationally agreed conventions on several types of controversial weapons, including the biological and chemical weapons conventions, the Incendiary Weapons Protocol, the Mine Ban Treaty, the Convention on Cluster Munitions and the Treaty on the Prohibition of Nuclear Weapons, as well as “upcoming treaties for examples on autonomous weapons”.

From this overview, we can see that the weapon types covered under “controversial weapons” exclusions may vary. Moody’s ESG Solutions Controversial Weapons screening covers ten types of controversial weapons:  Anti-Personnel Mines, Cluster Munitions, Chemical Weapons, Biological Weapons, Nuclear Weapons, Incendiary Weapons, Non-Detectable Fragments, Blinding Laser Weapons, White Phosphorus Weapons and Depleted Uranium Weapons. We provide data on all companies that, directly or through subsidiaries or joint ventures, design, develop or produce controversial weapons or their parts or provide related services (such as maintenance, testing, distribution, storage, transportation or trade). Users can filter involvements based on weapon type, involvement type (severity) and quality of the evidence supporting the assessment. We assess companies primarily using the most up-to-date open source information disclosed by companies (in their websites, annual reports, press releases, brochures, catalogues, investor presentations, etc.) or by governments acquiring their products or services (government contracts, budgets, databases, etc.).

Insights from Moody’s ESG Solutions on companies involved in controversial weapons

Moody’s data from April 2022 shows 83 companies, listed or issuing bonds, identified as showing the most severe types of involvement in controversial weapons (i.e., designing or producing whole munitions, or providing key components or key services for munitions):

– The countries in which these 83 companies are based are the United States (33), India (11), China (8), South Korea (7), France and Israel (5 each), the United Kingdom (4), Germany and Russia (2 each), Canada, the Czech Republic, Italy, Norway, South Africa and Spain (1 each).

– The controversial weapons in which these 83 companies are involved are nuclear weapons (50 involved companies), cluster munitions (39), white phosphorus weapons (15), anti-personnel mines (11), depleted uranium weapons (8) and incendiary weapons (6). Since some companies are involved in more than one weapon type, the total exceeds 83.

– No involvements were identified in chemical weapons, biological weapons, blinding laser weapons and non-detectable fragments. While these types of weapons are less and less produced today, the stocks that certain countries have are typically produced by state-owned facilities.

Listed and Bond Issuing Companies Involved in Controversial Weapons
Source: Moody's ESG Solutions (April 2022)
Figure 1 – Listed and Bond Issuing Companies Involved in Controversial Weapons
Source: Moody’s ESG Solutions (April 2022)

Recent evolutions of the controversial weapons industry

Thanks to the actions of the international community, non-governmental organizations, and also investors, the production of several types of controversial weapons has become increasingly rare. Investors’ pressure on involved companies continues to have concrete effects on their behaviour: in recent years, numerous companies have announced the cessation, in whole or in part, of their involvement in cluster munitions, also citing ESG factors and investor pressure among the causes. Such companies include, for example, Textron (USA) in 2017, Elbit Systems (Israel) in 2019, Hanwha Corporation (South Korea) in 2020, and Northrop Grumman (USA) in 2021.

Financial exclusions are also influencing the production of controversial weapons which are not banned under international treaties, but are often excluded by investors because of their controversial nature, such as white phosphorus weapons and depleted uranium weapons. Companies that have announced the cessation of their involvement in white phosphorus weapons include Rheinmetall (Germany) in 2018 and Singapore Technologies Engineering (Singapore) in 2019. Thales (France) has announced it will discontinue production of white phosphorus munitions by June 2022. In October 2021, BAE Systems (UK) announced its intention to cease the production of white phosphorus munitions and started “exploring timelines for withdrawal”. In January 2022, Northrop Grumman (USA) announced it will exit its prime role in depleted uranium ammunition production, following one final single production year contract.

In the area of nuclear weapons, while corporate involvement remains widespread because of significant investments by nuclear weapons States in the modernization of their nuclear arsenals and associated contracts, examples exist of companies exiting the business in recent years, such as Serco Group (UK), whose joint venture with Lockheed Martin (USA) and Jacobs Engineering (USA) lost its contract to manage and operate the UK Atomic Weapons Establishment (AWE) following the re-nationalization of AWE in June 2021. According to press reports, Serco chose not to bid for new nuclear weapons contracts because of ESG pressure. In its 2020 Annual Report, Serco stated: “Although it will have negative consequences for our profits, the loss of our contracts at AWE will allay the concerns of those stakeholders who felt uncomfortable with us being centrally involved with the production of nuclear weapons.”

As the exclusion of companies involved in controversial weapons remains a common divestment policy, based on international treaties, national laws and supranational regulations, we expect investors and companies to continue to adapt to evolving norms and standards in this field.

‍Article: Nicolò Scarpat and Jimmy Greer – Source: Moody’s

Laws prohibiting the financing of companies involved in controversial weapons:‍
Belgium: Law  of 8 June 2006 “Regulating Individual and Economic Activities with Weapons”  and amendments
Ireland: Cluster  Munitions and Anti-Personnel Mines Act 2008

Italy: Law  No. 220 of 2021 “Measures to counter the financing of companies  producing anti-personnel mines, cluster munitions and submunitions”

Liechtenstein: Law on the  brokerage and trade in war material 2009 and amendments

Luxembourg: Convention  on Cluster Munitions Bill 2009

Netherlands: Market  Abuse Decree (Financial Supervision Act) 2013

New Zealand: Cluster  Munitions Prohibition Act 2009

Saint Kitts & Nevis: Cluster  Munitions Prohibition Act 2014

Samoa: Cluster  Munitions Prohibition Act 2012

Spain: Law  33/1998, as amended by Law 27/2015

Switzerland: Federal  Act on War Material 1996 and amendments