Today, 22 January 2021, marks the entry into force of the UN Treaty on the Prohibition of Nuclear Weapons (Treaty). For the first time in history, the Treaty declares nuclear weapons illegal under international law, and prohibits a wide range of activities associated with the production, stockpiling, use or threat of use of nuclear weapons.
We have previously explored how the international community reached this juncture and why the Treaty is significant. But what does it mean for investors and companies involved in or associated with nuclear weapons-related activities?
The entry into force of the Treaty is significant not only for its State Parties (the Treaty currently has 51 parties and 86 signatories, Australia not amongst them), but also because it raises legal, compliance and reputational risks for companies involved in any activity prohibited by the Treaty, as well as investors with ties to such entities.
The coming years present an opportunity for companies and, in particular, institutional investors to:
- assess their ESG standing;
- implement and expand their corporate ESG policies;
- identify their portfolio’s exposure to nuclear weapons;
- take action to effectively manage compliance with the prohibitions mandated by the Treaty; and
- avoid the associated reputational and regulatory risks.
The Treaty contains the most comprehensive prohibition of a wide range of activities associated with nuclear weapons to date. It provides that a State Party must ‘never under any circumstances’:
- develop, test, produce, manufacture, otherwise acquire, possess or stockpile nuclear weapons or other nuclear explosive device;
- transfer to any recipient whatsoever nuclear weapons or other nuclear explosive devices or control over such weapons or explosive devices directly or indirectly;
- receive the transfer of or control over nuclear weapons or other nuclear explosive devices directly or indirectly;
- use or threaten to use nuclear weapons or other nuclear explosive devices;
- assist, encourage or induce, in any way, anyone to engage in any prohibited activity;
- seek or receive any assistance, in any way, from anyone to engage in any prohibited activity; or
- allow any stationing, installation or deployment of any nuclear weapons or other nuclear explosive devices in its territory or at any place under its jurisdiction or control.
In order to ensure compliance with the Treaty, it is expected that State Parties will make these prohibited activities unlawful under their domestic laws. Article 5 of the Treaty obligates State Parties to ‘take all appropriate legal, administrative and other measures, including the imposition of penal sanctions, to prevent and suppress any activity prohibited to a State Party under this Treaty undertaken by persons or on territory under its jurisdiction or control.’ As a result, the global regulatory climate is expected to become much less welcoming for corporations and activities that contribute to the development and production of nuclear weapons. The operations of a business headquartered or operating in a State Party to the Treaty which involve or result in a prohibited activity will be rendered unlawful.
Companies captured by the Treaty’s prohibitions include not only those in the business of manufacturing or stockpiling nuclear weapons or their components, but likely also those investing in businesses that engage in a prohibited activity. While financing of nuclear weapons-related activities is not expressly stated as a prohibited activity under the Treaty, as a matter of treaty interpretation, financing is prohibited to the extent it constitutes ‘assistance, encouragement or inducement’ of a prohibited activity. Under the customary law of State responsibility, this is commonly referred to as the ‘complicity regime’.
Notably, several States – including Belgium, Ireland, Italy, Liechtenstein, Luxembourg, Netherlands, Spain, Switzerland, France and New Zealand – have already implemented domestic legislation that prohibits direct and / or indirect financing of nuclear weapons. The entry into force of the Treaty is expected to expand this practice.
Reputational risks and a move towards divestment
Whether or not they are subject to a legal prohibition against nuclear weapons-related activity, companies and investors will continue to face increased reputational risks as a result of the stigmatising effects of the Treaty.
Institutional investors have started to divest their investment in companies manufacturing or financing nuclear weapons. The divestment trend gained momentum in the wake of the Treaty’s negotiation in 2018, with some prominent overseas investors declaring that they would screen and retreat from the nuclear weapons sector. For example:
- On 11 January 2018, the Dutch pension fund ABP announced that it would take steps to exclude manufacturers of nuclear weapons (or their associates and suppliers) from its investments (a total of approximately €3.3 billion).
- On 16 January 2018, the central bank of Norway, Norges Bank, announced the decision to exclude four additional companies involved in the production of nuclear weapons from the Government Pension Fund Global. These companies were added to the list of previously excluded nuclear weapons producers, as directed by Norway’s Ministry of Finance.
- In January 2019, in an open letter, a group of global asset managers and institutional investors managing a total of US$6.8 trillion in assets called on global index providers to ‘exclude controversial weapons from their mainstream indices in order to align their products with what has become standard practice or expectation among institutional and individual investors’. The initiative was led by Pictet and Swiss Sustainable Finance, and attracted the support of over 140 asset owners, asset managers, wealth managers and service providers worldwide. The open letter was sent to representatives from FTSE Russell, Morningstar, MSCI, S&P Dow Jones Indices and STOXX, sending a clear collective message by the global investment community, calling for an investment approach in line with international conventions.
That notwithstanding, nuclear weapons manufacturers continue to operate at a significant scale and to receive support from investors. As at 2019, the PAX Don’t Bank on the Bomb report valued total investment in the nuclear weapon industry at USD 748 billion across 325 financial institutions between January 2017 and January 2019 – with four financial institutions in Australia accounting for a minimum of USD 4.5 billion.
Institutional investors will need to carefully monitor the development of domestic legal frameworks in response to the Treaty, and may be required to develop screening and divestment mechanisms to ensure compliance.
Additionally, as the Swiss-led open letter underscores, civil society and investment industry continue to play an instrumental role in monitoring and raising awareness against financing of the nuclear weapons sector. With the Treaty’s entry into force, similar civil society and industry-led initiatives are expected to increase. Consequently, investors will also need to be mindful of the increased reputational risks that their continued support of the nuclear weapons sector may entail.
ESG frameworks as a compliance tool
Companies and institutional investors can employ risk mitigation strategies to prevent unintended financing or other assistance to nuclear weapon activities. This may take the form of formal commitments being included in corporate ESG frameworks to screen for, and not to fund, nuclear weapons.
Recent public initiatives, such as Don’t Bank on the Bomb’s ‘Hall of Fame’, have started to profile best practice examples of financial institutions that have comprehensively prohibited any financial involvement in nuclear weapon producing companies. The Hall of Fame currently includes Bank Australia, Australian Ethical and Future Super.
Having regard to the growing support for the Treaty, similar initiatives are expected to gain momentum, which will in turn drive the business community to proactively and meaningfully review their risk mitigation strategies in the coming years.
Possible complicity in crimes through nuclear arms supply
Under international law, individuals can also be held accountable for their actions. Prosecutions for crimes under international law may occur both in international jurisdictions, such as the International Criminal Court, and in national courts (owing to many national jurisdictions, including Australia, incorporating prohibitions of crimes under international law into their national laws).
Corporate officers may be held liable if, as a result of their decisions, corporations become involved in assisting in violations of international law. Corporate action that could result in liability may include the provision of goods or services used in the commission of international crimes, or the procurement and use of products or resources in the knowledge that the supply of these resources involves the commission of international crimes. The use or threat of use of nuclear weapons may, in the right circumstances, result in an international crime.
This risk, whilst low, is not merely theoretical. Examples can be seen throughout history and in present times. In relation to illegal weapons manufacture, an illustrative example can be found in the 2005 decision of the Hague District Court to convict at Dutch businessman who, in his role as an export broker, delivered thousands of tons of a substance used for creating a form of chemical weapons (mustard gas and/or nerve gas(es), according to the indictment) to Saddam Hussein’s Iraqi regime. The conviction was for being an accomplice in the war crimes of inhuman treatment committed by the regime, with a sentence of 15 years of imprisonment (increased to 17 years on appeal).
If you would like more information about responsible investment approaches or on environmental, social and governance opportunities and risks more generally, please contact us.
 See, for example, Nuclear Free Zone, Disarmament, and Arms Control Act 1987 (NZ); Federal Act on War Material 1996. See generally Law Library of Congress, Laws Prohibiting Investment in Controversial Weapons (November 2016) in relation to the European countries prohibitions on investment in certain controversial weapons, available here. In respect of France, see 2011 Law on the fight against the proliferation of weapons of mass destruction and their means of delivery (‘Loi n 2011-266 du 14 mars 2011 relative à la lutte contre la proliferation des armes de destruction massive et de leurs vecteurs’) legal Act on 14th March 2011, available here.
 International Commission of Jurists, Expert Legal Panel Report on Corporate Complicity in International Crimes (2008) Volume 2 (Criminal Law and International Crimes) at 19.
 Public Prosecutor v Frans van Anratt, District Court of the Hague, 23 December 2005 (upheld on appeal); also International Commission of Jurists, Expert Legal Panel Report on Corporate Complicity in International Crimes (2008) Volume 2 (Criminal Law and International Crimes) at 9.
 Frans van Anratt v Public Prosecutor, The Supreme Court of the Netherlands, 30 June 2009.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.