THEME PAPER: Controversial Weapons — Financing Restrictions and Prohibitions
Ethix SRI Advisors theme paper outlines the normative background for financing prohibitions and restrictions regarding controversial weapons and provides an overview of prohibitions and restrictions. This background is intended to provide some insight into challenges for investors and possible solutions to them.
Disarmament and arms control discussions have over the past six years assumed growing importance for investors across Europe—as a result of civil society’s growing expectations that investors implement voluntary restrictions on the financing of companies involved in ‘controversial weapons’, and consequently, of the mandatory financing prohibitions proposed or introduced in several countries.
‘Controversial weapons’ refers to weapons that are either illegal, as their production and use is prohibited by international legal instruments, or that are deemed particularly controversial, regardless of their legal status, because of their indiscriminate effects and the disproportionate harm they cause. The international instruments that prohibit or restrict such weapons do not always explicitly address financing. However, the understanding that they implicitly do cover financing, is receiving increasing support across the different stakeholder groups in this debate, from NGOs to legislators and investors. Discrepancies in the coverage of introduced or proposed national mandatory financing prohibitions in addition to definitional uncertainties, however, pose a challenge to investors.
Two key developments are worth emphasizing:
- Mandatory prohibitions are increasingly a mere confirmation of market developments driven by public pressure as well as pro-active investor engagement and action.
- While uncertainties regarding the scope and verification of financing prohibitions introduced by the frontrunner countries Belgium, Ireland and Luxembourg continue to remain largely unresolved, the debate in other countries seeks to address some of these issues. So far, however, significant uncertainties and discrepancies exist across countries.
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