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Vote November 29: Spotlight on ethical business practices

Pension funds curb arms investments, but oppose an outright ban

Lockheed Martin manufacturing plant
Many Swiss pension funds are reluctant about investing in arms manufacturers such as the US company Lockheed Martin with plants in Marietta, Georgia. Keystone/Erik S. Lesser

How sustainably do Swiss pension funds invest our retirement savings? And how do things stand in other countries?

With Swiss voters due to decide on banning arms industry investments, takes a closer look at current practices. 

When Switzerland votes later this month on whether to ban the financing of companies that produce war materiel, pension funds will be keeping a close eye on the polls. As some of the country’s biggest investors, with assets of around one trillion Swiss francs ($1.1 trillion), they would be particularly affected by a “yes” vote – as would thousands of policy-holders, whose savings are partly invested in occupational pensions.

What is the initiative about?

The people’s initiative to prohibit investments in the producers of war materiel seeks to cut the flow of funding to weapon-manufacturing companies. If the initiative is accepted on November 29, the Swiss National Bank, the state-run Old Age and Survivors’ Insurance, foundations based in Switzerland and pension funds would no longer be allowed to finance such firms – whether through loans, shares or bonds.

According to the text of the initiative, war materiel producers include all companies that generate at least 5% of their revenue from the manufacture of weapons, ammunition, military equipment, or individual parts that are not used for civilian purposes. Sports and hunting weapons, and the related ammunition, are excluded.

The ban does not apply to private individuals, banks and insurance companies. However, the initiative wants the Swiss government to push at national and international level so that similar restrictions are imposed on banks and insurance companies.

According to a survey by, Swiss pension funds are already reluctant to invest in the arms business. Of the 11 major funds that took part in our anonymous poll, eight stated that they do not currently invest in the manufacturers of so-called controversial weapons, which include cluster bombs, anti-personnel mines and weapons of mass destruction. The other three funds provided no information on the matter.

Administrative costs

Despite this, none of the pension funds surveyed was in favour of the people’s initiative. Most did not voice their opinion, while four recommended voting against. One of the main concerns linked to a “yes” vote was that it would limit the diversification options and thus increase the investment risk.

Several of the pension funds argued that administrative costs would rise as a result, although others disagreed. “The impact on administrative costs would be minimal,” one wrote. Meanwhile, three funds calculated the estimated additional costs, at a mere 0.01%.

Another argument put forward by the initiative’s opponents is that implementation would be impossible. Here, too, the pension funds’ opinions diverged: four agreed with this statement, while five considered that the ban could be implemented. One even replied that its investment policy already fulfilled the requirements of the initiative.

Weapons just one issue

The question being put to the vote in late November is ultimately just one issue among many within the broad topic of sustainable or ethical investing. Not investing in the arms business is part and parcel of the social responsibility that an investor can decide to assume. Social responsibility, in turn, is one of the three key elements of sustainable investing, together with the environment and governance (jointly referred to as ESG).

All 11 pension funds surveyed said that they applied ESG criteria in their investment process. They did so through a wide variety of means, but in particular by excluding certain sectors or companies and exercising voting rights. More than half the funds said they also practiced impact investing – that is, they strove to ensure that their investments not only did no harm, but also did some good.

Meanwhile, the Swiss Association for Responsible InvestmentsExternal link, set up by a handful of major pension funds five years ago, seeks dialogue with companies that commit serious breaches of ESG values, such as human rights. According to its managing director Tamara Hardegger, the association is currently in contact with around 160 companies around the world.

The association also publishes a blacklist of arms firms that manufacture controversial weapons. The list, which includes companies such as Lockheed Martin and Tata Power, is public and can also be used by smaller pension funds. Hardegger believes that most Swiss pension funds today already exclude the manufacturers of controversial weapons as a standard practice. “After all, Switzerland has a law that prohibits the financing of such weapons,” she says.

This law is, however, very cautiously worded – and deliberately so – as Hardegger explains. If it were stricter, investors who put money in passively managed standard index funds, for example, could get into trouble. “It’s all the more important for Swiss investors to find their own solutions for assuming their responsibility,” she concludes.

US lagging behind

Not only in Switzerland but throughout Europe, certain sustainability criteria have now become the norm for pension funds when it comes to investment allocations. This was the conclusion of a survey of 927 funds conducted in 2020 by the consulting firm MercerExternal link. It found that 89% of respondent firms took sustainability considerations into account when making investment decisions. One year earlier, this figure had stood at a mere 55%.

However, only 14% of the pension funds surveyed by Mercer had adopted a comprehensive, sustainable investment concept. By way of comparison, according to the latest SwisscantoExternal link pension fund study, just under one third of pension assets are invested in accordance with ESG criteria. Whereas small pension funds to date hardly apply sustainable investment concepts, their use is widespread among those managing assets of over CHF1 billion ($1.1 billion).

Pension funds in the United States are lagging behind. A 2018 survey by investment adviser NEPC found that only around 10% of North American pension funds took ESG considerations into account. More than one quarter stated that the issue was not relevant to them.

Of course, there have been so many developments in this field over the past two years that it is not entirely fair to compare the US figures for 2018 with current data from Europe. However, a look at the Mercer survey from 2018 reveals that even then, 40% of pension funds in Europe were already taking ESG issues into consideration.

Financial concerns central

This shift in thinking by European pension funds was, however, not prompted by sheer altruism and love for nature and fellow humankind either. Thus, 85% of those surveyed told Mercer that they complied with ESG criteria because of regulatory requirements. 51% were also concerned about minimizing financial risks, while 40% feared damage to their image if they ignored sustainability criteria.

Of the 11 Swiss pension funds contacted by, five nevertheless stated that they applied ESG criteria out of conviction – that is, to help create a better world. But in Switzerland, too, as our (non-representative) survey also shows, risk considerations seem ultimately to be a central factor.

The following example helps illustrate why neglecting ESG criteria can be risky. An investor buys shares in a coal mine as he believes that coal reserves have a current value of X. But he overlooks the fact that less and less coal is being burned because of the climate debate and that some countries are banning coal. The value of coal reserves thus decreases and the investor loses money.

This can also be applied to arms manufacturers: if, for example, more and more investors invest sustainably, the demand for shares in arms companies dwindles and prices fall as a result. This is probably one reason why four out of 11 Swiss pension funds replied that they had already stopped investing in the arms industry.

Translated from German by Julia Bassam


Adapted from German by Julia Bassam

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR