Based on information from the Stop Explosive Investment Campaign Toolkit, and the authors’ research experience alongside Cluster Munition Coalition member PAX, this briefing note finds that there are common loopholes in cluster munitions policies. For financial institutions (FIs), financing cluster munitions producers may still occur because either the policy does not apply at the group level, or the policy does not exclude the entire company, or the policy does not cover all types of investments. This note outlines the elements of a good cluster munitions exclusion policy.

Reading the cluster munitions policy is the first step. To comprehend the policy, it is required to read between the lines because the policy commonly leaves room for misinterpretation and may be unclear in terms of scope. It is recommended to contact the FI directly in order to obtain further knowledge and understanding regarding the exclusion policy. This will help to verify understanding and ensure the correct interpretation.

The following steps help in analysing a financial institution’s policy:

Does the policy apply to the group level?

A financial group generally conducts the investment policy, since they directly or indirectly supervise its subsidiaries. However, subsidiaries may still develop a policy independently of the group. It is important that the group’s policy is applied widely to all subsidiaries regarding cluster munitions divestment. Be careful not to be misled; a company called Group can still be a subsidiary of another group, therefore it is important to check whether a FI is a subsidiary or a parent company.

Does the policy exclude cluster munitions producers?

To ensure that the policy excludes cluster munitions producers, FIs should be clear about how to define a cluster munitions producer. Since companies and groups can easily reallocate capital internally, companies can invest profit made from one production line into other production lines. Hence a FI’s policies must exclude investment in a company that, in its own name or through its subsidiary, is involved in the production or development of (key components of) cluster munitions and explosive submunitions. Policies will have no exception for any type of cluster munitions and no exception for any activities by cluster munitions producers.

Does the policy cover all types of investments?

Policies should be developed to exclude all financial links with companies involving in the production and/or development of cluster munitions or explosive submunitions. Since FIs can be a group of global subsidiaries and affiliates that are involved in a vast range of activities, their investments could facilitate this production. Third-party investments, funds that follow an index, civilian project financing for a company also involved in cluster munitions, and assets managed by external managers, are the common financial links and common exceptions in investment policies.

There are many possible exceptions in a FI’s policy which allow FIs to invest in cluster munitions companies. This brief is useful for investors who want to completely divest from harmful cluster munitions, as it highlights common loopholes and the recommended elements for cluster munitions exclusion policies, helping to end cluster munitions production.

1. There are common loopholes in policies which could still allow financial institutions to finance cluster munition producers. Since it may not be possible to ban cluster munitions production, prohibiting the investment could help stop the production.
2. When reading a financial institution's cluster munitions policy, it is important to read between the lines to avoid misinterpretation.
3. It is recommended to directly consult with financial institutions to obtain further knowledge and understanding on the exclusion policy. It is necessary to clarify the findings and ensure an effective interpretation of the policy.
4. It is vital that a group cluster munitions exclusion policy is applied to all levels of subsidiaries. Otherwise, it may be possible for a financial institution to finance cluster munitions producers by means of their subsidiary.
5. Financial institution must clearly define the cluster munitions producers and associated activities that are included in their policies.
6. Investors should look out for common exceptions in investment policies that may link the financial institution to a company involved in the production and/or development of cluster munitions including key components. These exceptions include third party investments, funds that follow an index, civilian project financing and externally managed assets.
7. For third party investments, a red flag alert would be if the policy text indicates it is applied to the FI's 'own' investments.
8. For funds that follow an index, a red flag alert may be if the policy statement is about 'actively managed funds', it might not be applied to 'passively managed funds and hence an index tracker may not be covered. A second red flag alert may occur if FIs state they comply with cluster munitions 'divestment law', which may contain exceptions for an index.
9. For civilian project financing for a company that is also involved in cluster munitions, a red flag alert may exist if the policy uses terms such as 'earmarking' and 'ring fencing. These clauses are insufficient to prevent a company from reallocating capital within a group.
10. For assets managed by external managers, a red flag alert would be a policy that indicates it is limited to investments where the FI has 'full control'. It is necessary to know how the FI deals with investments made on its behalf.