Introduction

Weapons abuse inflicts severe suffering on civilian populations and often violates international human rights or humanitarian law. Investing in the arms industry exposes insurers to significant Environmental, Social, and Governance (ESG) risks. To assess these risks, insurers must distinguish between two factors: the product and the conduct. The product risk involves companies producing banned or controversial weapons. The conduct risk involves companies supplying weapons to countries or end-users that deploy them illicitly. Consequently, insurers must differentiate between controversial weapons and the trade in weapons with high-risk destinations.

Relevance for insurers

The defence sector, particularly in Europe and the United States, consists primarily of private, listed companies. Data from the Stockholm International Peace Research Institute (SIPRI) indicates that of the 20 largest arms companies investigated, 17 are based in the West and listed on stock exchanges. Beyond defence, sectors such as information technology are relevant, specifically regarding the use of artificial intelligence in autonomous weapons systems.

Frame of reference

International treaties provide the basis for determining controversial weapons and high-risk trade. Key conventions, such as the Nuclear Non-Proliferation Treaty and the Mine Ban Convention, prohibit specific systems including nuclear, biological, and chemical weapons, as well as anti-personnel mines and cluster munitions. Weapons are classified as controversial if they cannot distinguish between combatants and non-combatants or cause unnecessary suffering, even if not universally banned. Regarding trade, the Arms Trade Treaty and the EU Council Common Position (2008) establish rules for export controls, requiring respect for human rights and regional stability. UN and EU arms embargoes further restrict transfers to specific entities.

Due diligence

Insurers must undertake a due diligence process if investing in value chains relevant to weapons. This involves embedding Responsible Business Conduct (RBC) measures into policy and establishing specific investment criteria.

Controversial Weapons: It is recommended to identify and screen manufacturers of weapons that are disproportionate, cause unnecessary suffering, or fail to distinguish civilians from combatants.

Trade with High-Risk Countries: Insurers should screen for compliance with international obligations. Suggested criteria include avoiding supply to states subject to embargoes, those with high risks of human rights violations (referenced by Freedom House), or fragile states (Fund for Peace). Further indicators include the risk of corruption (Transparency International) and disproportionate military spending that undermines sustainable development.

Risk Mitigation: Risks should be prioritised based on gravity. Mitigation strategies include active voting at shareholder meetings and engagement with companies to drive structural improvements. If engagement fails, exclusion from the investment portfolio is the recommended final measure.

Accountability and reporting

Insurers are expected to report publicly on their due diligence policy and results, preferably annually. This follows the ‘knowing and showing’ principle from the OECD Guidelines. Insurers must select appropriate indicators to track performance against their policy. Reporting on engagement activities or exclusions is also encouraged to send a clear signal to the market, investee companies, and customers regarding the insurer’s commitment to responsible investment.