Index groups face fight over controversial weapons

Keystone

Index providers, including S&P Global, MSCI and FTSE 100 Russell, face pressure from a global coalition of investors that is demanding they strip out controversial weapons manufacturers from mainstream benchmarks.

The Swiss initiative, led by Pictet and Swiss Sustainable Finance, secured the backing of more than 60 domestic asset owners and managers with assets of $2tn a month ago. That number has swollen to 80 signatories controlling $3tn after international investors joined the campaign.

Candriam, the European asset manager, ING, the Dutch financial services group, and the Church of England are among the latest to sign up.

Companies involved in cluster munitions, anti-personnel mines and chemical, biological and nuclear weapons should be excluded from main benchmarks, the group argues.

No specific companies are named but those already sidelined by parts of the international community include Hanwha of Korea; General Dynamics, Lockheed Martin and Northrop Grumman of the US; Larsen & Toubro of India, and Aryt Industries of Israel. 

Many active managers screen out weapon makers, but passive investors, whose strategies replicate traditional indices, typically cannot.

“Investors tracking big-name benchmarks are all contributing to the financing of companies involved in controversial weapons,” according to a letter to be sent to the index providers by Swiss Sustainable Finance. “Many of them are unaware of this fact or are unable to invest in controversial weapons-free index funds/trackers.”

Eric Borremans, head of environmental, social and governance at Pictet Asset Management, said the index providers and Index Industry Association, the trade body, would be formally contacted in coming weeks to make the changes.

“Index providers need to reflect investor practices and expectations,” he said. “We are not talking about environmental, social and governance indices but mainstream indices.”

Mr Borremans said if such exclusions became embedded in index-construction rules, it would raise the stakes for those companies involved in such activities as well as promote greater transparency.

“Another outcome would be that controversial weapons manufacturers are dumped by the global investment community and that in turn would raise their cost of capital,” he said.

Edward Mason, head of responsible investment at the Church Commissioners for England, said the exclusion of controversial weapons manufacturers would be a huge step for responsible investment.

“Responsible asset owners do not want their passive investments forced to hold companies operating in violation of international treaties nor for such companies to be included in benchmarks and index-based derivatives,” Mr Mason said.

The campaign’s call for signatories is open until December 21 but may extend into January.

Countries including Belgium, Ireland, the Netherlands, New Zealand and Spain have laws against direct and indirect financing of controversial weapons manufacturers.