by Nick Cantrell
Originally posted at Green Future Wealth Management
Given the frenetic pace of news today, there was a monumental International event that took place this past Saturday, October 24th that went almost completely unnoticed by everyone, including the media and the investment community. The UN Treaty on the Prohibition of Nuclear Weapons (TPNW) was ratified by the 50th nation (Honduras), meaning that it will enter into force and become legally binding on those 50 nations 90 days later, on January 22nd, 2021. This means that less than 3 months from today, it will be illegal to develop, test, produce, manufacture, transfer, posses, stockpile, use or threaten to us nuclear weapons, or allow nuclear weapons to be stationed on their territory for the 50 nations who have ratified the treaty. Whether you are among the 64.7% of Americans who believe that the US should join the Treaty is irrelevant. Your retirement accounts, pensions, and investment accounts are likely invested in some of the 26 manufacturers of nuclear weapons, which include some of the largest companies in the S&P 500 like Boeing and Raytheon, and your investments may be at risk.
Although the United States and the eight other nuclear armed countries have all opposed the Treaty, history tells us that there will likely be significant implications for all countries, even nations who have not joined the Treaty. Although the United States chose not to join the Convention on Cluster Munitions (CCM) in 2010 or the Mine Ban Treaty (MBT) in 1999, production of those prohibited weapons has nearly ceased. Textron and Orbital ATK, two US based companies who manufactured cluster munitions in the US, chose to stop production since the CCM entered into force, and Lockheed Martin has stopped production of rockets, missiles intended to deliver cluster munitions. As in the past, we should expect to see companies forced to abandon areas of business that were previously profitable and required significant investment, based on international pressure and stigma. This is likely to have significant negative impact on companies that were already underperforming. In 2019, I analyzed the performance of nuclear weapons manufacturers and compared them to a benchmark of their peers. I found that nuclear weapons manufacturers took more risk and had lower returns than their benchmarks over a 3, 5, and 10-year period. This research was incorporated into “Nuclear Weapons are a Risky Business”, a working paper by Dr. Matthew Bolton of the International Disarmament Institute and was presented to the New York City Retirement Systems as part of engagement for divestment. After reviewing the evidence, divestment now enjoys a veto proof majority of support amongst the City Council.
Other financial institutions holding trillions of dollars have already divested from “controversial weapons”, typically defined as weapons prohibited by international law. The entry into force of the TPNW definitively puts nuclear weapons in this category and is likely to result in significant additional divestment. According to the 2018 Global Sustainable Investment Review, US money managers report that they apply weapons-related restrictions to $1.9 trillion in assets, a nearly five-fold increase from 2016. With the upcoming entry into force of the TPNW, this is likely to expand to include all of the 26 companies involved in the manufacture of nuclear weapons, which includes a number of the largest US and European stocks currently held in mutual funds and ETFs. As more financial institutions and money managers shift nuclear weapons manufacturers into their “restricted” category, it forces them to sell their current holdings, and removes potential buyers from the marketplace. This can have the impact of lowering stock prices due to decreased demand and can also make it tougher for companies to borrow cheaply in the bond market. We have already seen similar impacts amongst energy companies due to the increasing demands for fossil-fuel divestment amongst investors, and it is likely that we will see similar results amongst nuclear weapons manufacturers.
So, if you are an investor, what can you do to protect your investments? The first step is to determine which of your investments currently contain nuclear weapons manufacturers. If you manage your own investments, visit www.weaponfreefunds.org to search their database over funds from over 100 fund families to determine which of your investments contain nuclear weapons manufacturers. You can also use their database of high scoring funds to build a portfolio with lower exposure to nuclear weapons manufacturers. Unfortunately, the database does not include all funds, and only focuses on stock funds, with bond funds excluded altogether. If you work with a financial advisor, tell your advisor about your concerns with investing in nuclear weapons manufacturers and ask them to research what your current level of risk is (you do, after all, pay them to manage your investments according to your risk tolerance). If you are uncomfortable with what you learn about your investments, work with your advisor to come up with an alternative portfolio that excludes nuclear weapons manufacturers. If your financial advisor is unresponsive to your concerns or does not have the expertise needed, it may be that you need to find a new advisor who has more knowledge of how to incorporate ESG (environmental, social, and governance) criteria like nuclear weapons into your investments. Try searching the advisor directory at USSIF.org (The Forum for Sustainable and Responsible Investment) for a financial advisor who specializes in sustainable investing. Another good option is to look for an advisor with the Chartered SRI Counselor™, or CSRIC™ designation. These are financial professionals who have pursued additional coursework on sustainable and responsible investing from the College for Financial Planning, and you can find one in your area at www.cffpdesignations.com.
For the past 75 years, global leaders from Mikhail Gorbachev to Colin Powell have spoken of a nuclear weapon free world, with precious little to show in tangible results. ICAN won the Nobel Peace Prize in 2017 for their work in driving the adoption of the UN Treaty on the Prohibition of Nuclear Weapons, and now in less than 3 months the world is finally moving toward disarmament and divestment. Investors should watch their investments with a cautious eye to see how their portfolios will be impacted, and should consider taking steps now to limit their potential exposure by divesting from nuclear weapons manufacturers.
— Nick Cantrell, CFP®, ChFC®, CSRIC™, CLU®, is Founder and Wealth Advisor with Green Future Wealth Management with offices in Worcester and Northampton