Cluster munitions alert for investors

by: Michel Riemersma
14 December 2018

Ten years after a majority of all countries in the world banned production of cluster munitions in the 2008 Convention on Cluster Munitions, investors and banks are still exposed to cluster bombs. These weapons contain multiple explosive submunitions, “which can saturate an area up to the size of several football fields. Anybody within the strike area of the cluster munition, be they military or civilian, is very likely to be killed or seriously injured. [O]ften large numbers of the submunitions fail to function as designed, and instead land on the ground without exploding, where they remain as very dangerous duds”.

Exposure to these controversial weapons creates serious risks for banks and investors. These risks are partially regulatory, as in a fairly unique legislative trend, eleven countries since 2008 banned the financing of cluster munition production and trade. And they are reputational, as the international Cluster Munition Coalition (CMC) is successfully stigmatizing all financial institutions acting against the intentions of the 2008 Convention on Cluster Munitions.

Banks and investors therefore try to prevent involvement in the cluster munitions sector by relying on exclusion lists drafted by national authorities or ESG providers. However, Profundo’s recent report for PAX on the financing of cluster munitions shows there are three developments that should alert investors to be cautious in relying on such lists exclusively.

First, new producers are still entering the field: LIG Nex1 from South-Korea is the newest publicly listed cluster munitions producer. None of the financial institutions assessed in the PAX report indicated that LIG Nex1 is excluded from investment, even though the company presented its Tactical Surface Launch Missile cluster munition to the public in 2017. Even the renowned Norwegian Government Pension Fund Global lost its place in PAX’ Hall of Fame because of investments in LIG Nex1. The Dutch Authority for the Financial Markets (AFM) does not publish its exclusion list, which was updated in October 2018. It is very likely, however, that this update did not yet contain LIG Nex1. The AFM updated its list again after the publication of the PAX report, potentially to include LIG Nex1.

Second, some companies previously producing cluster munitions are still involved in services to the existing cluster munition stockpiles. US companies Northrop Grumman (which acquired cluster munition producer Orbital ATK) and Textron announced in 2017 that they no longer produce cluster munitions. These two companies accounted for the lion’s share of institutional investments in cluster munitions companies. Investor pressure has clearly contributed to their decision to stop producing cluster munitions, which shows the effectiveness of CMC’s campaign. However, publicly available US government contracts show that in 2018 both companies are still involved in assistance with the stockpiling and/or retention of cluster munitions, which is prohibited under the Convention on Cluster Munitions. Textron also supported, at least until 30 November 2018, the Indian Air Force in integrating cluster munitions in its arsenal.

Although the companies were in 2018 still involved in activities that are prohibited by the Convention, a few financial institutions in the Netherlands and New Zealand, two countries that have divestment legislation, have removed Textron and/or Northrop from their exclusion lists in the past year. For example, Dutch insurance company Aegon and the New Zealand Superannuation Fund excluded Textron in 2017, but in 2018 revoked the exclusion.

Third, state-owned and private cluster munitions producers are usually not mentioned on exclusion lists, but these companies can be taken over by other, listed companies. In 2016 Elbit Systems (Israel) was already selected to take over the previously state-owned Israeli cluster munition producer IMI Systems. After a long regulatory process, Elbit Systems completed the acquisition in November 2018. During that process, in August 2017, the American bank Wells Fargo and its French colleague BNP Paribas provided a USD 180 million loan to Elbit Systems. It is unclear if these banks realised what risks this loan has now exposed them to.

The 2008 Convention on Cluster Munitions, the legal prohibitions to invest in cluster munitions and the campaign by the Cluster Munition Coalition have increased the regulatory and reputational risks for financial institutions of being exposed, in one way or another, to these controversial weapons. As not all banks and investors are sufficiently conscious of these risks, there is still a long way to go for financial institutions to stop financing cluster munitions companies. Simply relying on available exclusion lists is not enough to manage such risks effectively, thorough and up-to-date research is needed to understand which companies are involved in banned cluster munition activities.
 

For more information or research opportunities on this topic, please contact: m.riemersma@profundo.nl