Keeping Investment Ethical

By IFM - 7 April 2011


When I was growing up in Pakistan, they came begging at our door, or they would accost us at traffic lights and hover at the car window until the lights changed. They were victims of cluster bombs from the Soviet occupation of Afghanistan. Sometimes they would push their broken bodies along in a little trolley that you could hear rattling down the road. Some of them were stunningly beautiful children, but what was most striking about them was their missing limbs: a hand, a foot, or a leg.

Cluster bombs have been used in Afghanistan, Iraq, Lebanon, Vietnam, Laos and every other major conflict since World War II. They have caused incredible suffering and leave behind a deadly legacy even after the conflict is finished.

The bomb itself consists of many - often hundreds - of small explosive bomblets. They are like landmines, but worse because they have a wide area of effect. They remain live for decades after the conflict and since they are often brightly coloured, children mistake them for toys and pick them up. In Laos, nearly 40 years after the war, American cluster bombs lie scattered across the countryside rendering it uninhabitable. In Lebanon, Israeli cluster bombs dropped in 2006 still claim victims today.

Australia will soon ratify the Convention on Cluster Munitions - a landmark international treaty that prohibits the use, production, stockpiling and trade of cluster bombs. The Government is rightly taking measures to honour this Convention with the Criminal Code Amendment (Cluster Munitions Prohibition) Bill, but it has a loophole. There is no prohibition on investments in companies that produce cluster bombs.

The Bill makes it illegal for a person or bank to provide financial assistance to, or invest in, a company that develops or produces cluster munitions - but only where that person or bank intends to assist, encourage or induce the development or production of cluster munitions by that company. This drafting implies that financial assistance is illegal only if it is provided for the purpose of cluster bomb production. In other words, while direct financial assistance for cluster bomb production may be deemed illegal, indirect financial assistance to a company that produces cluster bombs will still be regarded as legal under this provision.

The fact is that none of the companies making cluster bombs source their finance directly. None of them advertise that they are raising money to produce cluster bombs. They are diversified conglomerates with interests in areas like aerospace, defence and electronics. They raise money through corporate loans, syndicated loans, bond issues and share placements, and they allocate this money to their operations as they see fit.

Their financing is indirect. Unless there is a mechanism to restrict weapons' producers from using such financing towards the production of cluster bombs, the legislation will not be effective in complying with the spirit of the Convention, which is to ban these weapons.

The Australian Council of Super Investors (ACSI) was the only investor group at the hearing of the Senate Foreign Affairs, Defence and Trade Committee last week seeking to close this loophole. Among the non-government organisations, we drew some surprised looks from the senators. It is not often that they hear investors asking to be regulated, but it may be necessary because otherwise, ethical and moral concerns can be overlooked by the industry. In a groundbreaking report produced by IKV Pax Christi (the Netherlands) and Netwerk Vlaanderen (Belgium) in April 2010, 146 financial institutions from 15 countries around the world have been identified as providing over US$43 billion worth of investments and financial services to seven producers of cluster bombs. This is an appalling indictment of the finance and banking sector.

The fact that ACSI was campaigning in Canberra in recent weeks is not surprising. In 2007 a documentary, The Cluster Bomb Feeling, sparked debate in the Netherlands when it drew attention to the fact that many Dutch pension funds had investments in companies that produced cluster bombs. ACSI represents the interests of over 39 not-for profit super funds that manage over $250 billion of Australian retirement savings for two-thirds of the Australian workforce. The organisation is only too well aware of the reputational risk that this issue poses.

Banks, brokers and fund managers cannot afford to be complacent either. There are seven publicly listed companies overseas that produce these weapons. How many of them are lending money to these companies, trading their shares, and putting the savings of ordinary Australians to finance what they do? Without legislative prohibition, how many of them will carry on providing finance to these companies? Of course, some enlightened boards may choose to divest, but many will do nothing, even when public opinion is against them.

The Bill offers Australia the opportunity to cut off the supply of Australian capital to these companies once and for all. This is not a radical proposal. New Zealand, Ireland, Luxembourg and Belgium have all introduced legislation to ban providing financing towards and investment in cluster munitions.

Simply, the Bill should prohibit the direct and indirect financing of companies involved in the production of cluster munitions. An amendment in line with the recommendations made by the Joint Standing Committee on Treaties in August 2009 will fix this loophole. Requiring Australian institutions to comply with this prohibition should not be onerous. It would be a missed opportunity if Australia ratifies the Convention but does not prohibit indirect investment in companies making cluster bombs. We are one of the world's largest pension markets. Surely we can do better than have our retirement savings tainted by human suffering.


Azhar Abidi is a member of the Committee of Management, ACSI and Director, Responsible Investment at Industry Funds Management