- Database provides a differentiated view of arms exports and defense companies

- Message to politicians and the financial sector: Arms industry must not be classified as social and sustainable

- Analysis shows: ESG rating agencies tend to give arms companies better sustainability ratings the more weapons they export to war zones

 

Berlin | May 17, 2023

Today, the NGO Facing Finance has published the first update of the „ExitArms” database (www.exitarms.org). This is the first publicly available, global database on companies that supply arms to warring states.[1]

The analysis now covers arms deliveries in the period 2016-2021 (previously: 2015-2020). The database lists around 600 companies that were involved in arms exports during this period, either directly, through subsidiaries or via joint ventures. These companies together supplied 41 warring parties worldwide, mostly involved in intra-state wars.

The ExitArms database aims first and foremost to create a basis for financial institutions to develop systematic divestment, engagement, or lending policies for defense companies that supply weapons to warring states. At the same time, the database can also serve as a source of information for policymakers, regulators, academics, the media, and civil society.

 

What is new?

- Facing Finance has analyzed the ESG ratings of arms exporters by various sustainability rating agencies. It turns out that the methodology of most ESG ratings results in particularly good ratings for those arms companies that export most weapons to war zones around the world. The full analysis can be found at exitarms.org/stories

- Arms exports to war zones for the year 2021 were researched and the companies involved in them were included in the database. At the same time, 2015 arms deliveries and the associated companies were removed to remain up to date. This shall prevent the database from including companies that have changed their controversial export policies.

- 30 previous ExitArms companies are no longer part of the database, as no new arms exports to warring parties were recorded for them after 2015. Instead, about 100 new companies are included in the database. These have been added because they either supplied arms to war zones in 2021 or are involved in arms exports to a country newly classified as warring party by the Heidelberg Conflict Barometer.

- In addition to these companies, 95 corporations that are local co-producers and not arms exporters are now listed as additional information. These defense contractors produce on the ground in war zones or warring states in cooperation with foreign companies and are therefore not part of the approximately 600 ExitArms companies.[2]

- As "verified use" such cases were added, in which not only the company involvement in the arms export can be proven, but also that exactly these weapons were used in the war. Examples include weapons sent to the war in Libya despite a UN arms embargo or weapons used in the war between Armenia and Azerbaijan.

- In addition to the publicly available database at exitarms.org, we provide a customized ExitArms Investor List for financial institutions upon request.

 

 

Analysis on defense companies and sustainability:

Major misconception about ESG ratings from sustainability rating agencies: Retail investors often believe that ESG ratings assess the social and environmental sustainability of a company, its products and business practices. As a result, they typically expect ESG investments to avoid participation in war fueling companies.  In fact, most ESG ratings instead measure the financial sustainability risks of a company, i.e., how social, environmental, and governance factors can cause financial losses. Luca Schiewe, project coordinator of ExitArms, warns: “Many investors are unaware of these differences between different ESG ratings. This misunderstanding frequently causes confusion and greenwashing allegations.”

Facing Finance has analyzed the ESG ratings of various sustainability rating agencies for arms exporters. This analysis shows that defense companies that export arms to war zones perform better than all peer groups on ESG ratings that measure financial sustainability risks - e.g., Refinitiv ESG Score, Bloomberg ESG Score, S&P Global ESG Score, MSCI ESG Rating. Only two ratings that assess sustainability controversies - e.g., Refinitiv ESG Controversies Score, Sustainalytics Controversy Rating - actually assign worse ratings to companies that supply arms to war zones than to defense companies that do not.

As most ESG ratings focus on financial sustainability risks, it is found that the more arms a defense company supplies to warring parties, the better tends to be its ESG rating.[3] In ESG ratings that measure financial sustainability risks, companies that are included in the ExitArms database due to their export policy on average receive better sustainability ratings than other defense companies. Furthermore, within the group of arms exporters, those that supply the most weapons to the most diverse war zones receive the best ESG ratings. Investors using common ESG ratings for a best-in-class investment approach without sector exclusions actually increase their investments in defense companies that export weapons to war zones.

The ExitArms database on which the analysis is based is intended to contribute to a fact-based debate on arms exports and to enable a differentiated view of defense companies and their export policies. Observing an attempted image change of the arms industry to the "guarantor of security and sustainability", Thomas Küchenmeister, Managing Director of Facing Finance, warns: "Since the Russian invasion of Ukraine, the public debate often overlooks the fact that arms companies not only produce their goods for domestic national defense or to support Ukraine, but also supply them to warring, human rights violating autocracies worldwide. Deliveries to warring parties involved in the conflicts in Libya, Syria, and Yemen make the arms industry's claim of being 'social' and 'sustainable' seem cynical. Rating agencies can be expected not to ignore the actual conditions in the affected war zones in their ESG ratings."

While the database shows 'only' the tip of the iceberg, it provides empirical evidence that the arms industry is systematically arming warring parties worldwide. Therefore, the arms industry should not be classified as sustainable or social, despite its massive lobbying efforts regarding the EU's social taxonomy. Banks, insurance companies and pension funds have started to adopt UN and OECD standards on human rights in business practices. The defense industry, however, apparently believes that these standards do not apply to it. To avoid losing all credibility, the financial sector, which increasingly portrays itself as sustainable, should not classify the arms industry as social and sustainable. Instead of relaxing voluntary commitments on arms exports, financial institutions should exclude the companies in the ExitArms database from loans, insurance, investments, and underwriting mandates until they change their export practices.

 

Key findings of the database update:

- Some defense companies from Western industrialized states such as Leonardo, Airbus, Raytheon, Lockheed Martin, Thales, and BAE Systems massively supply warring parties worldwide. However, Russia's Rostec ranks first, with arms deliveries to 23 belligerent states between 2016 and 2021. In addition, NPO High-Precision Weapons, JSC Russian Helicopters, Rosoboronexport, Almaz-Antey, United Aircraft Corporation, and Uralvagonzavod send Russian weapons to wars worldwide. The Russian arms industry not only supports the current war of aggression against Ukraine, but has also fueled various conflicts in recent years, including supplying arms to rival conflict parties (e.g., India and Pakistan).

- The top eleven companies in terms of the number of warring states supplied during the period analyzed were (consolidated at the parent company level): Rostec (23 warring parties), followed by Leonardo (17), Airbus, Raytheon (16 each), Lockheed Martin (15), NPO High-Precision Weapons (14), JSC Russian Helicopters, Thales (13 each) BAE Systems, Boeing and Pratt & Whitney (12 each).

- Most of the companies supplying weapons to war zones are headquartered in the following states: USA (95 companies), Russia (65), Germany (48), France (35), China (32), Turkey (23), and the United Kingdom (21). Thus, more than half (57%) of the companies that were found to have exported arms to warring parties are based in these seven countries.

- Of the 48 German companies listed in the database, those that supplied the most warring parties were Germany-based Airbus subsidiary Airbus Defence and Space (12 warring parties supplied), Rolls-Royce subsidiary MTU Friedrichshafen (11), Rheinmetall, Volkswagen[4] (7 each), Wegmann & Co GmbH[5] (6) and ThyssenKrupp (5).

 

Further information about the ExitArms database

ESG ratings of ratings providers are not public. The analysis of ESG ratings of various sustainability rating agencies and defense companies can be found here: exitarms.org/stories

The methodology of the ExitArms database can be found at exitarms.org/methodology. The ExitArms database only records wars, as defined by the „Heidelberg Conflict Barometer“, that are waged without a United Nations mandate. During the period under study, some wars in Afghanistan, Mali, Syria, and Congo were fought under UN mandate and are therefore not included in the ExitArms database. According to the Heidelberg Conflict Barometer from HIIK (Heidelberg Institute for International Conflict Research), the ExitArms database only considers conflicts in categories 4 ("limited war") and 5 ("war"): https://hiik.de/hiik/methodik/; For conflict analysis, the ExitArms database also uses the BICC Database from the Bonn International Centre for Conflict Studies to identify human rights violations and risk assessments on illegal arms trafficking by warring parties: https://www.bicc.de/. In a second step, corresponding arms exports are identified at country level. Sources used include the Stockholm International Peace Research Institute (SIPRI), specialist journals (e.g. Jane's Defence Weekly, International Security and Defence Journal, Shephard, African Security), subject-specific websites (e.g. Defense World, Army Technology, Naval Technology, Defense News, Army Recognition, Naval News), government websites, commercial databases and primary sources from defense companies (e.g. company websites, arms fairs, brochures). In a third step, Facing Finance meticulously researches the "arms supply chain" at the company level: from design to transport of the finished weapon system. The ExitArms database includes companies responsible for weapons design and production as well as licensing, repair, modernization, modification, sales, and transport.

A first analysis on ExitArms companies and their funders can be found on the consumer platform Faire Fonds, which is operated by Facing Finance and urgewald in cooperation.

Disclaimer: The arms deliveries to Ukraine documented in the database took place after Russia's illegal annexation of Crimea in 2014 and before Russia's invasion in 2022. Users of the ExitArms database must decide for themselves how they value the deliveries and the companies involved in them. Russia's war of aggression against Ukraine is an exception in which arms deliveries support Ukraine's right to self-defense. Russia's invasion is markedly different from the wars covered in ExitArms, which are mostly intra-state. Facing Finance strongly condemns Russia's war of aggression. At the same time, the legitimate right to self-defense and the support for Ukraine must not be misused to justify future arms deliveries of any kind and to any recipient. Here, it is important to avoid double standards and selectivity, so that no politics of interests are pursued with humanistic camouflage.

 

Contact

Thomas Küchenmeister, Managing Director of Facing Finance, kuechenmeister@facing-finance.org, +49-175 4964082

 

[1] In the context of the ExitArms database, "warring states" are countries in which wars are being waged and external states that are directly involved in a war in another country through troops.

[2] Local co-producers are, for example, Saudi companies that produce weapons for the Saudi army together with foreign corporations in Saudi Arabia and are thus not considered exporters. They are primarily meant to supplement the information around the foreign company's involvement.

[3] All ratings using the most common approach of measuring financial sustainability risks relative to peer industries show a positive correlation between company scores and arms exports to war zones. Regression analyses that controlled for other potentially determining factors such as company size and country of incorporation confirm a statistically significant positive effect of arms exports to war zones on ESG ratings. However, it is not possible to conclude a causal relationship since it cannot be ruled out that other confounding factors influence ESG ratings as well.

[4] Volkswagen is involved via its subsidiaries Traton and MAN Energy Solutions.

[5] Wegmann & Co GmbH is involved via the company KNDS (KMW and Nexter), which is half owned by Wegmann & Co GmbH.