Nuclear Conflict: Why We Must Consider the Risks
In the wake of Russia’s attack on Ukraine, the risks of nuclear conflict have become clearer both inside and outside the world of finance. Yet many market watchers have simply thrown up their hands under the mistaken assumption that when it comes to nuclear weapons, nothing they do will matter. Such a philosophy is inadequate on multiple fronts.
First, while a “limited” nuclear exchange or even a single detonation would be catastrophic and almost certainly deadly for thousands if not millions, it would not end life on earth. People will still very much care about their jobs, their savings, and their investment portfolios. When the pandemic struck, our financial concerns didn’t disappear despite COVID-19’s horrific human toll. Our financial stability still mattered then, just as it would after a nuclear conflict.
While investing based on nuclear risk in the short term might be a fool’s errand, implementing the necessary risk controls across various market environments assuredly is not. Proper diversification, monitoring the financial resilience of counterparties, limiting leverage, and keeping the duration of liabilities fairly long and matched to assets are all important and logical steps in any risk-mitigation strategy.
But there is a much more pressing rationale for increasing our focus specifically on nuclear risk: Whether it is a regional or global nuclear exchange among current or future nuclear states or non-state actors, we need to reduce the likelihood of such an event in the first place.
Sustainability considerations come into play as well. After all, the UN Sustainable Development Goals (SDGs) are sustainable investing’s North Star. Nuclear risk reduction is implicit in Goal 16, “Peace, Justice and Strong Institutions.” Indeed, nuclear war, like climate change, constitutes an existential threat that could prevent us from ever realizing any SDG goal. Even investors who aren’t focused on sustainability understand why avoiding nuclear conflict is in their long-term self-interest.
Of course, international relations are the government’s responsibility, aren’t they? That may be true, but just as governments lacked the foresight to prevent the COVID-19 pandemic and were often flatfooted in their response, they alone cannot be counted on to forestall a nuclear conflict or deal with its aftermath.
So, what should investors do?
In light of the war in Ukraine, many financial institutions, particularly in Europe, are reconsidering negative screens around defense companies. This evolution is a good thing: Blanket exclusions and divestment are overly blunt instruments in any sector, and defense is no exception. The world will always have its share of bad actors, and an effective defense industry can help provide both protection and deterrence.
Moreover, when it comes to effecting change, engagement is preferable to divestment. That holds true for defense firms or any company involved in the manufacture of nuclear weapons or their related delivery systems, or otherwise contributes to the risk of nuclear conflict.
What might engagement look like? It could, for instance, mean increased oversight of a defense firm’s lobbying efforts or any potential conflicts of interest among board members. Since the defense sector isn’t the only source of nuclear risk, we should also screen firms in other industries on a range of issues and engage with them on any shortfalls. Among the potential considerations:
- Industrial and Manufacturing Companies: How do they ensure compliance with sanctions regimes and limit the potential for the export or diversion of dual-use technologies that could be part of a nuclear supply chain?
- Shipping Firms and Port Operators: Are they enforcing sanctions and adhering to export controls? Do they deploy nuclear detection technology?
- Utility Companies: With respect to nuclear energy and terrorism threats, are they complying with cybersecurity regulations and best practices? Are their systems air-gapped?
- Banks: What sort of anti-proliferation financing measures do they have in place? Do they understand which of their customers’ technologies or products might have a dual-use component?
- Big Tech: How are they limiting the export of certain 3D printing technologies and other products that could contribute to nuclear risk? What are they doing to detect and expose deepfakes and other divisive material that could ignite geopolitical conflict?
- Social Media: What are their security protocols for protecting the personal accounts of government officials and other influential figures? How are they mitigating the spread of inflammatory propaganda?
The degree to which a firm’s business contributes to potential nuclear conflict shouldn’t be the only consideration. We need to look at what companies are doing to proactively reduce the risks of nuclear conflict. Which media firms are producing content highlighting nuclear risks? How are companies working to bridge the gap between adversarial nations and populations? Such factors should be included in our calculations.
The exact risks and sectors we should screen for may be open to debate. But we need to have that debate today. It is time for investors, businesses, accounting standards boards, environmental, social, and governance (ESG) raters, NGOs, and governments, among others, to start that discussion.
If not now, when?
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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