How investors can reduce the risk of a nuclear conflict
There is a moral and material imperative for socially responsible investors to help reduce nuclear risk by advocating on behalf of clients, says Etica Sgr’s Aldo Bonati.
The next meeting of the G7 nations will be held in Hiroshima, Japan, on May 19-21. With global peace currently under great strain, this venue is a testament to the peril of nuclear weapons.
There are countless reasons why a socially responsible investor – one who chooses sustainable and responsible investments – should avoid companies involved in the production of nuclear weapons as a viable investment target. Among these, two stand out.
The first is a moral imperative, since the catastrophic humanitarian and environmental consequences of deploying nuclear weapons cannot be controlled in time or space.
The UN Guiding Principles on Business and Human Rights – a 2011 milestone document referenced by numerous companies and investors to guide their conduct – recommend that companies minimise adverse human rights impacts linked to their operations, products or services, even if they do not directly contribute to those impacts.
The Final Report on Social Taxonomy from the Platform on Sustainable Finance, an EU advisory body, dated February 2022, includes “certain kinds of weapons” among harmful activities, that is “activities fundamentally and under all circumstances opposed to social objectives [and] for which there are no ways to make less harmful”. The report mentions many international conventions and treaties as sources for identifying such activities, including the Treaty on the Prohibition of Nuclear Weapons, known as the TPNW.
The second reason is financial materiality: the threat of actually using nuclear weapons creates a systemic portfolio risk for investors. As nuclear weapons are capable of destroying much of human civilisation, their use intuitively implies economic damage and falling markets across every sector and asset class. Investment companies should therefore minimise any negative risk, even more so socially responsible asset managers when considering nuclear weapons. This is precisely the kind of risk management their clients expect and deserve.
An article by the CFA Institute in June 2022 explains why the investor community must consider the risks of nuclear conflict. It presents compelling reasons for increasing investor focus on nuclear risk, and concludes: “Whether it is a regional or global nuclear exchange among current or future nuclear states or non-state actors, we need to reduce the likelihood of such an event in the first place.”
Role of stewardship
So what resources can institutional investors deploy to implement this kind of risk management?
One powerful tool available to investors is the practice of stewardship. For socially responsible investors, stewardship is the use of influence to maximise overall long-term value, including the value of common economic, social and environmental assets, on which returns and clients’ interests depend.
The main tools of stewardship are: dialogue with investee issuers; voting at investee equity issuers’ AGMs; and advocacy with governments, regulators and standard setters.
But how can investors exercise stewardship to reduce the risks of a nuclear conflict? Let me give an example from my personal experience at Etica Sgr, an Italian asset manager that offers only socially responsible investment funds.
In January 2021, the TPNW came into effect, comprehensively outlawing nuclear weapons and any assistance with their manufacture or production. However, as of today, only 92 states have signed the treaty, of which only 68 have ratified or accessed it.
Early in 2022, Etica Sgr and the International Campaign to Abolish Nuclear Weapons – which was awarded the 2017 Nobel Peace Prize for its efforts on the weapons ban treaty – drew up a seminal statement of investor expectations about the implementation of the TPNW.
With the support of the main socially responsible investor networks – Principles for Responsible Investment, Interfaith Center on Corporate Responsibility, Shareholders for Change and the Italian Sustainable Investment Forum – we presented the statement to the institutional investors’ community with the aim of raising awareness of the treaty. Having gained 37 international institutions as co-signatories, we delivered the statement at the first meeting of state parties of the TPNW, convened by the UN in Vienna in June 2022.
In 2023, Etica Sgr and ICAN revised the statement, increasing the demands, and with the aim of extending its outreach.
To date, 69 investors have signed up to this revised statement, which we will deliver at the second meeting of state parties in New York City this November.
The power of investors sending clear signals to governments and policymakers cannot be underestimated. Any concerned financial institutions should, therefore, consider signing the statement. The stakes are just too high.
Aldo Bonati is stewardship and ESG networks manager at Etica Sgr