Profiting from the carnage

July 18 2023 - Jim Blackstock, Product Manager

The war in Ukraine has provoked many questions about morality, ethics and international law. The destruction delivered on Ukraine is lamentable, and that destruction is only set to increase with the recent announcement that the United States is willing to send cluster munitions into the arena. This decision has caused great controversy and tension among her allies, with the United Nations High Commissioner for Human Rights calling on both forces to not use cluster munitions.

However strategically relevant the weapons may be, there is little argument that their deployment will lead to increases in collateral damage and greater risks of prolonged danger from unexploded ordinance in the region, likely long after the war is over. International law attempts to restrict military action targeting non-military areas, yet studies by Landmines & Cluster Munition Monitor found that of nearly 25,000 deaths attributed to cluster munitions since 1960, 94% have been civilian non-combatants, and 80% are attributed to events from "lingering remnants", unexploded ordinance remaining after the conflict, rather than from the initial strike.

For responsible investors the talk of the deployment of cluster munitions is particularly galling. When Responsible Investment first emerged, it was spearheaded by religious groups which did not want to profit from industries that would do social harm. When the Pax World Fund was launched in 1971, regarded as the first responsibly managed retail fund, it did so explicitly to avoid investments profiting from the Vietnam War, initially screening out all weapons manufacturers alongside tobacco producers and highly polluting companies. Since then, the avoidance of armaments manufacturers alongside the "sin stocks" of tobacco, alcohol and gambling has been a cornerstone of ethical investing, and in the case of cluster munitions, the 2008 Convention on Cluster Munitions, marked a success for ethical investors and campaigners as more than one hundred countries would go on to sign and ratify a treaty that banned the use, stockpiling and manufacture of such weapons.

Today, an "armaments" exclusion remains a near ubiquitous feature of responsibly managed retail products, and discretionary portfolios where clients have expressed an intention to invest responsibly. On our database of retail funds, more than 90% of those with exclusionary processes maintain armaments exclusions - for the year so far, it is the most selected filter by concerned investors, beating climate change and the sin stocks mentioned above. This emphasis is mirrored in our Companies Database of equity level analysis, where our "Armaments - Controversial Weapons" (that would remove companies with exposure to Cluster Munitions and other controversial weapons) features as the most-used arms related filter for companies over the period.

Exclusions for armaments work on various levels, from weapons manufacturers to those more indirectly involved the industry, and revenue thresholds may also be applied, but almost universally funds will exclude manufacturers of "unconventional" or banned weapons, including cluster munitions covered by the 2008 Convention. Some investment managers will also do the same across all portfolios as a 'house rule'.

An emphasis on banned and unconventional weapons is therefore clear for ethically managed investments, seeking to neither profit from weapons that have a disproportionate impact on non-combatants or are deemed so destructive by the international community that they are restricted by treaty. In the case of cluster munitions, the relatively high "dud" or failure rate (when ordinance does not explode but remains live) and wider area of affect makes them particularly indiscriminate in their deployment. Cluster munitions are often deployed, as is likely in Ukraine, via conventional artillery shells that include submunitions or "bomblets", spreading over a wider area with less precision. This does mean they can send bomblets wide of their target, impacting non-combatants and civilians, but more impactful is the dud rate. As one projectile releases multiple bomblets, even a standard dud rate of between 10 to 40% can lead to many unexploded charges and an ongoing risk to life, long after the war has moved on or ended. To help remedy this, the United States has only committed to sending cluster munitions with very low (less than 1%) dud rates, however, how these rates manifest in practice is yet to be seen.

For responsible investors then, is there a response to this move towards the deployment of armaments long campaigned against and marginalized for their indiscriminate destruction? Poignantly, the United States, Russia and Ukraine are all countries which have not signed the 2008 Convention, and so are free to stockpile weapons of this type for strategic use. However, international pressure has certainly pushed the manufacture of such weapons out of the mainstream investment universe, indeed of the more than 3,000 global stocks that are covered in Ethical Screening's in-depth research remit, zero are flagged for involvement in controversial or banned weapons, despite around 40 being flagged for having major involvement in arms manufacture. Private companies, such as Brazil's Avibras, or state-owned entities, have become the primary producers of cluster munitions, with few (such as India's previously state-owned Bharat Dynamics Limited or South Korea's Hanwha Group) being available to investors. However, cluster munitions may be deployed using a range of artillery pieces or aircraft in the field, including Multiple Launcher Rocket Systems (MLRS), such as those manufactured by Lockheed Martin, further muddying the picture for those who wish to avoid connection to controversial weapons and their combat use.

Ultimately, as we began this piece, the Ukraine conflict will pose ethical and moral questions for some time to come, but in the responsible investment space clarity of what it means to profit from industries that do harm is important, notably as we enter a period of higher scrutiny of portfolios for unexpected investments. As we have seen, due to the limited number of listed companies involved, an armaments exclusion that focuses on banned or controversial weapons has a reduced impact when constructing a portfolio that is "anti-armaments" - if an investor or institutional client wishes to pursue an anti-war investment approach greater transparency and discussion will be needed about the limitations of certain investment strategies, and greater strictness may be required to avoid profiting from the carnage.

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