A growing number of financial institutions apply specific exclusion policies preventing financial exposure to all types of controversial weapon producers. Many policies go on to elaborate that controversial weapons are weapons that cause indiscriminate harm by design.

What makes a weapon controversial?

Those deploying weapons must be able to distinguish between combatants and non-combatants, and they must take the principles of proportionality and the precautionary approach into account. Long-term effects also play a role: by definition, weapon systems that have long-term effects, such as land mines, cluster munitions and nuclear weapons, make virtually no distinction between combatants and non-combatants. These characteristics make weapons controversial.

Most financial institutions agree that weapons which are prohibited under international law are controversial weapons. Others indicate that a weapon that cannot distinguish between civilians and soldiers is also controversial. Generally, cluster munitions and anti-personnel landmines, as well as biological and chemical weapons are specifically named as controversial weapons. As nuclear weapons are both indiscriminate and prohibited under international law, they too are controversial and should be comprehensively excluded from any investment portfolio.

Why have a controversial weapons policy?

The reason to classify weapons as controversial is to assist in conducting due diligence in the investment portfolio. Screening of the investment portfolio is based on each institutions own  criteria, the point being to identify the risks to which they are exposed. The institution can then add these criteria to the ESG criteria, which are subsequently incorporated into the investment process.

Avoiding risk

The purpose of due diligence is to identify and prevent risks, but it is still possible for an investee company to have an adverse impact with regard to weapons and the trade in weapons. By definition, the risk associated with the deployment of controversial weapons and the controversial trade in weapons is that civilians will suffer greatly, including serious bodily harm and death. There is also a significant risk of many other human rights being violated. It is the gravity of this potential adverse impact that is paramount when prioritising the risk.