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Aon Retirement and Investment Blog

Firearms and Munitions Exposure in Your Portfolio

In the wake of the Parkland, Florida school shooting at Marjorie Stoneman Douglas High School in February, 2018, there has been increased interest from investors in divestment from holdings related to guns and weapons. Aon has put together the following thoughts on this topic.
Aon’s Policy on Divestment
Generally speaking, Aon suggests that investors eschew divestment in lieu of active engagement policies. We believe that investors that sell positions lose what is perhaps their only significant bargaining chip with a company – their proxy vote. As active investors, shareholders can suggest resolutions and band together for proxy votes that stand a chance of influencing future company behavior. Investors may engage with companies directly to the extent they own stock outright, as New York Common has elected to do in an attempt to increase board diversity[i], or investors can request that outside asset managers interact with corporate management to effect change. One recent example of such a campaign occurred in October 2017, when a group of shareholders, led by Zevin Asset Management, began a campaign to encourage Starbucks to improve its paid family leave policy.[ii] 
Unfortunately, once an investor is no longer a shareholder in a company, their opportunity to engage with that company and influence corporate behavior is diminished, and may in fact be limited to protests, letter-writing campaigns and other forms of indirect impact. Certainly, as Bill O’Reilly and, more recently Laura Ingraham discovered, public pressure can force companies (in this case Fox News) to change their behaviors. However, generally speaking, research has shown that consumer driven boycotts often do not result in negative financial consequences for a targeted firm.[iii]
In addition, divestment results in tracking error, with the associated risk of underperformance relative to an undivested benchmark, and also reduces portfolio diversification. The study “The Divestment Penalty: Estimating the Costs of Fossil Fuel Divestment to Select University Endowments” (Bradford Cornell, 2015) examines the potential fossil fuel divestment cost to Harvard, Yale, MIT, Colombia and NYU, projecting that, if a set of major institutions that pursued divestment continued to do so, and experienced return shortfalls in line with what they experienced in the past, their weighted average asset shortfall would be 6.4% over 20 years and 16.7% over 50 years.[iv] In addition, research in the wake of CalPERS $671 million tobacco divestment in 2000 found that the total amount of their foregone gains during the period stood at $3.6 billion.[v] Actual return experience from divestment will be highly dependent on the specifics of the divestment strategy and the actual, unpredictable, long term returns of the divested securities.  In 2015, a meta-study that examined 75 primary studies found that there was no significant impact on performance as a result of negative screening – either positive or negative.[vi] Given the uncertainty around the issue, including risk of reduced diversification increased tracking error and risk of underperformance relative to a market benchmark, Aon continues to urge caution around divestment, particularly if there is a possibility of corporate engagement.
We do recognize that some organizations, either because of strongly held beliefs, public pressure, state laws, specific missions or a combination thereof may have reason to divest from certain investments, especially if the only desired corporate behavior is that they stop engaging in essential businesses. In these instances, divestment may be appropriate and Aon stands ready to work with these investors, after apprising them of applicable risks and rewards.
Firearms Divestment: Practical Guidelines and Implications
Aon’s research has found roughly 16 publicly-traded securities focused on firearms and munitions, including eight listed on the NYSE, three that trade over the counter and five that are listed on foreign exchanges. There are additional companies involved in the manufacturing and sale of firearms and munitions, but the remaining firms, including those that may be household names, are generally privately held. Both publicly traded and privately traded firearms stocks may be included in a variety of indexes and investment manager portfolios. 
The relatively small number of publicly traded firearms stocks often surprises investors, as does the comparatively modest economic impact of the firearms industry on the U.S. economy. The following chart shows the impact of the firearms industry on the US economy, including business revenues, business profits, personal wages and jobs. While $51 billion may seem like a large number, the economic impact of the coffee industry, for example, tops $225.2 billion[vii], and firearms opponents highlight that the cost of fatal and non-fatal gun violence in the US was $229 billion, which includes $8.6 billion in direct expenses for emergency services and medical care.[viii]

Economic Impact of the Sporting Arms and Ammunition Industry in the United States

For Aon clients that manage direct investments, the path to divestment is relatively straightforward: Investors would need to identify their exposure to firearms stocks, evaluate the cost of divestment, and then determine whether or not to exit those positions.
However, many of Aon’s investor clients and prospects manage insignificant amounts or even no assets in-house, so divesting directly may not be an option or may only address some of their firearms exposure. For example, when CalPERS divested of directly-managed tobacco stocks, they made no requirement that underlying managers do the same. As a result, in early December 2016, CalPERS still had 0.2% of their portfolio exposed to tobacco-related investments, despite their earlier direct divestment initiative.[i] CalPERS voted to require underlying investment managers to also divest from tobacco later that month.[ii]
Because of their reliance on outside money managers, Aon’s institutional clients will almost certainly need to consider engaging with external investment managers in their portfolios if they wish to pursue divestment. Possible courses of action include:
  • Examine index funds for exposure to firearms and determine a suitable course of action, which may involve either a determination to either maintain exposure to those indices or to initiate a search for firearms-free index options.
  • Discuss firearms exposure and divestment options with separate account and other investment managers to determine whether divestment is feasible or desirable from the manager’s point of view.
  • Be aware that there may be transaction costs associated with selling targeted stocks and/or maintaining a firearms free account. A number of separate account managers to whom we’ve spoken have expressed a willingness to manage a simple negative screen without significant additional fees from the investor, but any costs associated with divestment will need to be evaluated on a case-by-case basis.
  • Examine firearms-free separate accounts and funds if existing fund managers are unwilling or unable to accommodate firearms divestment requirements.
  • Engage with private equity and other fund managers who own or have exposure to privately-held firearms firms and determine if divestment from those underlying firms is possible.
  • Investors should understand that some investment managers may be unable or unwilling to accommodate specialized divestment mandates within commingled products, so an exact replica of an existing portfolio may not be feasible.
In addition, investors who opt to divest from firearms will also need to determine whether they wish to divest of general and sporting goods retailers that sell firearms and providers of tangential services (such as training and safety equipment) as well. It is important to note that, as the net is cast wider to include major retailers and other companies with services related to guns, investors will likely increase their risk of tracking error.
There are a number of reasons why an investor might choose to consider divesting from firearms and munitions firms, particularly as national debate on the topic intensifies. There are a number of nuances involved with any divestment, however, and as fiduciaries, investors will need to fully vet the cost, benefit and feasibility of such a move before proceeding.
Meredith Jones is a Partner in Aon’s Global Investment Center and is based in Nashville, TN.

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