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 financial world. However, many market watchers have simply thrown their hands up under the mistaken assumption that when it comes to nuclear weapons, nothing they do will matter. This philosophy is inadequate on multiple fronts.

First, while a “limited” nuclear exchange or even a single detonation would be catastrophic and almost certainly fatal to thousands, if not millions, it will not end life on earth. People will still care a lot about their jobs, their savings and their investment portfolios. When the pandemic hit, our financial worries didn’t go away despite the horrific human cost of COVID-19. Our financial stability still mattered then, just as it would after a nuclear conflict.

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While investing based on short-term nuclear risk may be a fool’s errand, implementing the necessary risk controls in various market environments certainly is not. Adequate diversification, monitoring the financial strength of counterparties, limiting leverage, and keeping liability durations fairly long and matched to assets are important and logical steps in any risk mitigation strategy.

But there is a much more pressing reason to increase our attention specifically to nuclear risk: whether it is a regional or global nuclear exchange between current or future nuclear states or non-state actors, we must reduce the likelihood of such an event in the first place.

Sustainability considerations also come into play. After all, the United Nations’ Sustainable Development Goals (SDGs) are the pole star of sustainable investment. 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 achieving any of the SDG goals. Even investors who are not focused on sustainability understand why avoiding nuclear conflict is in their own long-term interest.

Of course, international relations is the government’s responsibility, isn’t it? That may be true, but just as governments lacked the foresight to prevent the COVID-19 pandemic and were often lukewarm in their response, they alone cannot be counted on to prevent a nuclear conflict or deal with its consequences.

So what should investors do?

In light of the war in Ukraine, many financial institutions, especially in Europe, are reconsidering negative screens around defense companies. This development is a good thing: blanket exclusions and divestment are excessively forceful 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 protection and deterrence.

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Also, when it comes to effecting change, engagement is preferable to divestment. This is true for defense companies or any company involved in the manufacture of nuclear weapons or their related delivery systems, or otherwise contributing to the risk of nuclear conflict.

What could compromise look like? It could, for example, mean greater oversight of a defense firm’s lobbying efforts or any potential conflicts of interest among board members. Since the defense sector is not the only source of nuclear risk, we should also review companies in other industries on a range of issues and engage with them on any flaws. Among the possible considerations:

  • Industrial and manufacturing companies: How do they ensure compliance with sanctions regimes and limit the potential for export or diversion of dual-use technologies that could form part of a nuclear supply chain?
  • Shipping Companies and Port Operators: Are They Applying Sanctions and Adhering to Export Controls? Do they deploy nuclear detection technology?
  • Utilities: Regarding Nuclear Power and Terrorist Threats, Are They Adhering to Cybersecurity Standards and Best Practices? Do your systems have air space?
  • Banks: What kind of anti-proliferation financing measures do they have in place? Do they understand which of their customers’ technologies or products may 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 the deep fakes and other divisive material that could ignite a geopolitical conflict?
  • Social networks: What are your security protocols to protect the personal accounts of government officials and other influential people? How are they mitigating the spread of inflammatory propaganda?

The degree to which a company’s business contributes to potential nuclear conflict should not be the only consideration. We need to look at what companies are doing to proactively reduce the risks of nuclear conflict. Which media companies are producing content that highlights nuclear risks? How are companies working to bridge the gap between opposing nations and populations? These factors should be included in our calculations.

The exact risks and sectors we should be targeting may be open to debate. But we need to have this debate today. It is time for investors, companies, accounting standards boards, environmental, social and governance (ESG) assessors, NGOs and governments, among others, to start this discussion.

If not now, when?

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images/diegograndi

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David Epstein, CFA

David Epstein, CFA, has spent nearly 20 years as a research analyst on both the sell-side and the buy-side, focusing on the entire capital structure. He has been studying nuclear risks for some time and is trying to educate the financial and business communities about what they can do in terms of prevention and preparedness. He has an MBA in finance from UCLA and a BA in psychology from Johns Hopkins. He can be contacted at [email protected]

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