What potential reputational risks does exposure bring?

Concerns about reputational risk are given increasing attention by financiers and investors seeking to reduce negative attention for the products, projects and companies they support. There is an increasing effort to integrate ESG (Environment, Social and Governance) into risk management. The climate crisis and attendant efforts across the sector means a lot of attention is paid to the "E" in ESG. Nuclear weapons pose a risk to both environment and society. 

The norms against nuclear weapons, combined with the legal obligations to disarm (Nuclear Non Proliferation Treaty) and comprehensive prohibitions (Treaty on the Prohibition of Nuclear Weapons) mean investment in companies producing these weapons may trigger increased negative public attention and scrutiny. Over 80% of EU citizens support laws to hold companies accountable for harm to people and the environment, and agreed that companies should be legally involved not to get involved in human rights violations or environmental crimes anywhere in the world.

The demand for increased transparency in reporting, including on sustainability, human rights due diligence, and other impacts of financing or investment policies is an opportunity for increased screening and exclusion. Screening out investments and financing of companies involved in the nuclear weapon industry is a reputational risk protection measure. 

Retail banks also face increased scrutiny of their lending practices. Combined with international pressure for nuclear disarmament, investments in companies involved in producing key nuclear weapon components elevates their reputational risk. 

Reputational risk is subjective, yet financial institutions representing at least $1.3 trillion in assets under management have assessed exposure to nuclear weapons producers not a risk worth taking. As many financial institutions seek to position themselves as sustainable and responsible, information about possible financial exposure to the companies involved in weapons of mass destruction increases reputational risk.

What potential regulatory risk does exposure bring?

The Treaty on the Prohibition of Nuclear Weapons may impact existing contracts for nuclear weapons among the companies currently financed, leading to financial risk, or may force states to interfere in business activities that are now illegal under the TPNW. 

Companies may also be required to demonstrate that they are not conducting prohibited activities in jurisdictions that ratified the Treaty, a potentially costly endeavor. 

Materiality

Risks are prioritised based on the gravity (severity, scope and irreversibility) of the actual or potential adverse impact. 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.

The potential regulatory or reputational risks assumed with continued financing relationships with the companies involved in the production of nuclear weapons are significant enough that they must be considered material and financial institutions and other institutional investors should enact policies to manage and mitigate these risks, the simplest of which is the exclusion of any company involved in the nuclear weapon industry.