Firearms and the management of investor risk

April 5, 2013 | 2 min read

Parallels have been drawn between similar divestment campaigns, most notably the campaign surrounding South African apartheid in the 1980s and tobacco companies in the 1990s. However, important differences exist between the current firearms debate and the divestment campaigns of the past, not the least of which is that the right to bear arms is constitutionally enshrined via the Second Amendment. Also unlike the tobacco industry in the 1990s, firearms manufacturers and retailers are currently protected from liability lawsuits through the PLCAA. While a number of public pension funds have announced plans to divest from firearms, others in states like Idaho and Texas, where public opinion favors protecting gun rights over gun control, do not consider investments in firearms an issue.

Differing public opinion across regions and uncertainty concerning regulatory outcomes present varying levels of reputational, regulatory and financial risk for investors. Taking into account such variation, investors may consider responding to the issue of firearms by pursuing strategies that include elements of engagement and/or screening and divestment.

Engagement

Engagement may be an appropriate course of action for investors who do not regard the manufacturing and/or retail sale of firearms as inherently problematic, but are concerned with factors such as the types of firearms that a company manufactures or the public policy positions that it advocates. Engagement is likely to be appropriate for investors and asset managers with relatively low reputational risk exposure and/or client concern.

In implementing an effective engagement strategy investors can establish formal standards concerning issues such as product lines or political involvement. Examples of formal standards can be found within the Sandy Hook Principles, which require gun manufacturers to support and promote the implementation of a universal federal background check system and to reevaluate their involvement in the sale and production of assault weapons for use by civilians. Investors should clearly communicate such standards to the relevant companies through a formal engagement process and request that the companies establish timelines for implementation and compliance.

Screening and Divestment

For investors and asset managers with moderate-to-high reputational risk exposure and/or moderate to-high client concern, a screening and divestment strategy may be an appropriate course of action. Screening criteria may incorporate various dimensions of a company’s involvement. First of all, the type of Involvement: As discussed above, the firearms products that have generated the greatest concern and risk are assault weapons manufactured for the civilian market and ammunition for such weapons. Screening criteria may be general or may focus on the manufacturers of specific products of concern. Criteria may also distinguish between the manufacturing and retailing of firearms. For example, an investor could decide to place all companies with direct involvement in manufacture of firearms on an exclusion list but allow investment in firearms retailers.

Also, the level of involvement can be assessed. The percentage of annual revenues that a company derives from an activity of concern can also be incorporated into screening criteria. For example, a revenue threshold screen could stipulate that a company involved in the manufacture of firearms must not obtain more than 5 per cent of its revenue from such activities, or that a retailer of firearms must not earn more than 10 per cent of its revenue from such activity. In addition, screening criteria can also incorporate a company’s political involvement, such as efforts to influence the passing of legislation to ensure universal background checks.

At the very least, investors should be aware of any holdings that they have in companies involved in the manufacture or retail sale of firearms and be prepared to respond to client or stakeholder concerns that may pose reputational risk.