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The revelation by the Dutch television current affairs programme Zembla that the Netherlands' largest pension funds invest in the arms trade, including companies producing cluster bombs and landmines, put pension fund managers on the defensive.

One of the arguments used by pension funds was that, although they considered cluster bombs "abhorrent", they did not have specific guidelines that prevented them from investing in such weaponry. They also maintained that it was difficult to screen the several thousand companies in their portfolios for evidence of involvement in the manufacture or sales of controversial weapons.

Yet the methodology for this kind of screening is available. Earlier this year, Dutch Sustainability Research (DSR), the Dutch partner of the Sustainable Investment Research International (SiRi) Company, launched its Controversial Weapons Radar (CWR) service. As its name suggests, this provides investors with research on the involvement of companies worldwide in certain types of weapons, the use of which, although not illegal, raises important humanitarian concerns.

The scope of this research is unique, says Ronald Lubberts, director of DSR: "As far as we know this is the only service that is offered that covers the area of controversial weapons on such a wide scale. There are numerous NGO's [non-governmental organisations] that follow, often in their home markets, companies that produce controversial weapons, and lists of companies are available from international action groups, often targeting specific companies. But these are often quite fragmented and with a different agenda."

CWR is targeted at financial institutions and investors who want comprehensive, reliable and up to date information on company involvement on controversial weapons, says Lubberts. It covers all companies throughout the world involved in the research, production, maintenance or sale of weapons that care considered controversial because of the indiscriminate and disproportionate humanitarian impact they have on civilian populations. These weapons are anti personnel mines, biological and chemical weapons, cluster munitions and depleted uranium ammunition and nuclear weapons.

The DSR service is essentially a new wrapper for a substantial body of casework, built up from research, correspondence and contact with thousands of companies, which DSR has accumulated since 2001, says Diederik Timmer, sustainability analyst at DSR. "We have been case-building in this area for some years, and we thought that the time was right to label it in this way to be able to advise more investors on these subjects."

CWR draws on a database developed for this purpose by DSR. As a part of the SiRi network, DSR has access to SiRi Pro (Sustainability Profiles and Ratings Online). Yet this does not drill down far enough for DSR's purposes, says Timmer. "We have developed a new database for this area to provide specific answers to the needs of investors, that want highly detailed information on companies' involvement in controversial weapons."

In the area of controversial weapons, definitions are important, and DSR has tried to define the different types of weapons as clearly as possible, using definitions form international treaties where these are available. A clear understanding of the nature of a company's involvement in controversial weapons is also important. Investors need to know whether their involvement is direct or indirect, and whether it is conscious or unconscious.

"This kind of research is fairly complex because it is not only about weapons but it is also about the companies that are related to these weapons and the subsidiaries of these companies," says Timmer.

The CWR service focuses on some 4,000 companies, although this number is likely to increase as more information is gathered. Company by company research provides information on specific products or services. The aim is to define the ‘involvement status' of a company..

To assess the involvement status, DSR distinguishes between direct and indirect involvement in the manufacture or sale of controversial weapons. DSR regards companies that produce the complete weapon or key munitions related components as directly involved. It regards companies that provide more ancillary services such as certain delivery systems and non munitions related, non-core components as indirectly involved.

"Making such a distinction is considered useful to better delineate companies that make a conscious and specific decision to produce important parts of these weapons and those that do not," says Lubberts. "Given that the nature of the involvement may have different implications for investment and financing decisions, we consider this additional information highly relevant."

DSR also provide details of the revenue from military contracting earned by companies that have either a direct or indirect involvement in controversial weapons.

"Clients have different perspectives, " says Lubberts. "Sometimes they are interested in the classification into direct and indirect involvement which gives an intuitive feeling of which companies are seriously involved and which are less involved. Others will look at the sales that are generated by the production of weapons like these. For some years, pension funds have designed investment policies based on these sales thresholds, so to speak."

DSR advises but the clients decide, he adds. "We try to provide clients with the information they need and we do help them develop their policies. But they have to make the decisions themselves. The commotion caused by the Dutch Television programme Zembla clearly shows that pension fund members ask their pension funds to take responsibility and not wait for others to take the first step or the legislator to take action."

Pension schemes can use the information provided by DSR in a number of ways. Schemes funds who want to engage with companies - that is, deal with them directly - can use the DSR database information to choose which companies to engage with.

Engagement requires careful preparation and accurate briefing, says Lubberts. "Pensions funds who engage with companies need to be certain that they have the right research to be able to enter a dialogue with these companies," he says.

This dialogue may provide new information that, subject to the rules of client confidentiality, can be fed back to DSR's database. "Companies are not necessarily a closed book and often they provide the client with information. Of course, it is up to the client whether they share this information with us."

Pension funds' dialogue can be with interested parties other than companies, such as news media and local focus groups, says Lubberts. "To engage with these groups, you need to be well-prepared and well informed. You need to use an independent source of information, rather than a party with an agenda you don't share.

Only a few investors will go to the lengths of engagement, however. Most pension funds are likely to use the information gleaned by DSR to screen their portfolios for evidence of controversial weapons involvement.

Some will use the information for blacklisting particular companies, and periodically updating these blacklists. Some Dutch pension funds, notably PGGM, already have such blacklists.

They may also use the information to implement their commitment to the United Nations Principles for Responsible Investment (UN-PRI), the voluntary code launched in May last year. The aim of UN-PRI is to expand the amount of research, and number of asset management mandates, that explicitly incorporate environmental, social and governance issues.

Dutch signatories to UN-PRI so far are the ABP and PGGM pension funds and ABN Amro Asset Management, Robeco and SNS Asset Management.

Responsible investment is already on the agenda of many pension funds, and Lubberts feels that Dutch pension funds may have been unfairly criticised for their approach to investment in companies involved in controversial weapons. "Pension funds have been working towards a position on this for a number of years. "

However, he suggests that others may not be aware of the screening services that are available. "It is often an eye opener to politicians and labour unions that information of companies involved in controversial weapons is available.

"But it goes beyond commercial interests, and we want the market to know that the availability of information is no obstacle to taking action. A mission of our firm is to promote transparency on sustainable investing in general, and this is a way to support this."

The issue of controversial weapons is only one area of concern, however. The Zembla investigation revealed that there were concerns about other issues, notably child labour and the environment. In this respect, the controversial weapons issue are part of a broader agenda of responsible investments, says Timmer.

"In our experience pension funds start off with the weapons issue but soon realise there are more controversial matters than weapons, such as companies with poor records on child labour or environmental damage," he says.

In response to this, DSR together with SiRi have developed a Global Compact Compliance Service, which screens more than 2,500 companies globally on their adherence to the 10 global compact principles in the areas of human rights, labour, the environment and anti-corruption.

"The service gives investors an overview of ‘the worst of the worst' companies in their portfolios," says Lubberts. " The companies that were listed as offenders in respect of child labour and environmental damage in the Zembla television programme match very closely the companies labeled by us."

Lubberts suggest that the SiRi Global Compact Compliance Service answers the criticism that Controversial Weapons Radar ignores everything except controversial weapons. With this service, pension funds' narrow concern about the manufacture and sales of cluster bombs and land mines should lead towards a broader concern for human rights.

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