As a representative of the financial sector and a responsible investor, Storebrand bears the responsibility to ensure the implementation of human rights due diligence within the arms industry. We manage investments in 4,500 companies, on behalf of pension clients, to diversify risk and secure their futures. In this situation, the responsibility that we bear is independent of the states' ability or willingness to fulfil their own human rights obligations.
Several types of risks
In addition, as investors we consider it as part of our fiduciary duty to mitigate risks that we consider to be material. There are direct risks associated with the arms industry, which violates human rights. These can include legal liabilities such as fines, cancellations, lawsuits, and civil litigation. Moreover, reputational risk and decreased brand value might also be in these companies. Finally, as an investor with a longer-term perspective, we also view the potential systemic instability caused by misuse of weapons, as a risk of significant importance.
Given the current gaps in weapons export licensing regimes and the lack of adherence to international humanitarian law, coupled with the high incidence of armed conflict globally, our role is crucial.
Emerging human rights due diligence regulations often fail to apply to the arms industry, thus increasing the exposure to human rights risks within Storebrand's portfolios and funds. As investors, Storebrand must mitigate these risks as part of its fiduciary duty. Moreover, Storebrand recognizes its enhanced responsibility, alongside other stakeholders and actors, to push companies towards conducting thorough human rights due diligence and improving corporate behaviour.
Our approach
At Storebrand, we utilize two types of screening processes: one is based on the nature of the products made by the entities we may invest in, while the other is based on the conduct of the entities themselves.
Product-based screening targets controversial weapons, including anti-personnel mines, cluster munitions, chemical and nuclear weapons. This screening also encompasses weapons not banned by treaties, such as white phosphorus and lethal autonomous weapon systems, given that they cannot uphold international humanitarian law.
Additionally, we conduct a conduct-based screening, which is not limited to the aerospace and defense sector. The dual-use nature of many products complicates this process. The primary challenge is the lack of sufficient information. This makes conduct-based screening more difficult than product-based screening, necessitating assistance from ESG data providers to analyze risks. With investments in over 4,500 companies, Storebrand requires extensive data.
However, data providers mostly focus on the countries that are under arms embargoes, an approach which provides some alerts regarding potential problems. This has led to some exclusions in the past, but it does not cover all companies.
Often, we lack direct information linking weapons to violations and victims on the ground – yet this is a crucial foundation for undertaking discussions with companies about their conduct. Exports to high-risk countries also pose a challenge: we are partly dependent on civil society to provide information, enabling investors to fulfil their due diligence responsibilities.
After conducting product-based and conduct-based screenings, if there is suspicion that a company might be involved in armed conflict, we engage directly with the company. A significant challenge is that many companies operate under export license regimes and argue that state approvals ensure compliance with all laws and regulations, including international humanitarian law. These companies are often not at liberty to disclose information on defense contracts, citing national security concerns. Regarding emerging technologies, the issue is even more complex, as they are not always clearly defined in searchable categories. We observe that artificial intelligence is increasingly used for military purposes, such as enhanced targeting and spyware. The lack of multi-lateral regulation for these technologies, which might serve as weapons or components, compounds the problem. There are often no licensing and export regimes in place for them, nor a framework to evaluate whether these technology companies' conduct aligns with responsible business practices. Consequently, we have had to exclude some companies due to these concerns.
Storebrand has been rigorously assessing the sustainability of the defense industry. Currently, we do not classify the defense sector as sustainable and maintain strict exclusions for controversial weapons for all of our funds, and restrictions on conventional weapons (and military contracts) across nearly half of our funds. This approach reflects our commitment to ethical investment practices. This results in a significant portion of its portfolio being weapon-free.
Legitimate but extremely high risks
We do acknowledge that there can be a legitimate need to manufacture and deploy conventional weapons for legitimate defense purposes - and as such, we do not impose blanket exclusions on all weapons across all of our funds. However, we do remain vigilant in mitigating the potential misuse of these weapons through diligent evaluation processes. The results of Storebrand's due diligence are clear: 41 entities have been excluded for involvement with controversial weapons, while 66 have been excluded for involvement with conventional weapons/military contracts. Among the companies that remain invested are 15 companies within the aerospace and defense sectors, where there are ongoing engagements on compliance with the companies’ ethical standards.
The global context of rising conflict and hostilities among nations states, and between nation states and non-state actors, does significantly impact our work, requiring that we focus on international humanitarian law, rather than political considerations.
Respecting international humanitarian law is a shared responsibility. From the investor perspective, it is crucial that the business we invest in, stay up to date with these laws, to clearly understand the actions they need to take, in order to stay in compliance. Specialized community-based (“grassroots”) organizations can also contribute significantly. Cooperation is essential. Investors and civil society, particularly grassroots organizations, must collaborate closely. Storebrand encourages grassroots organizations to reach out or contact the Principles for Responsible Investment (PRI). We are actively discussing conflict-affected areas and welcome engagement from grassroots groups.
