Following the Money Trail

Impacts for Business of the Ratification of the Treaty on the Prohibition of Nuclear Weapons

On 22 January 2020, the Treaty on the Prohibition of Nuclear Weapons (Treaty) entered into force, declaring once and for all that nuclear weapons are prohibited under international law, including international humanitarian law and international human rights law. Neither Australia nor India are signatories to the Treaty. Nevertheless, while the Treaty itself has been in development for many years and may not be binding on some State Parties, the broader effects of prohibition should be seriously considered by all businesses and countries.

Article 1 of the Treaty sets out myriad ways in which a State Party must 'never under any circumstances' carry on certain activities, including to:

• Develop, test, produce, manufacture, otherwise acquire, possess or stockpile nuclear weapons or other nuclear explosive devices;

• Transfer to any recipient whatsoever nuclear weapons or other nuclear explosive devices or control over such weapons or explosive devices directly or indirectly;

• Receive the transfer of or control over nuclear weapons or other nuclear explosive devices directly or indirectly;

• Use or threaten to use nuclear weapons or other nuclear explosive devices;

• Assist, encourage or induce, in any way, anyone to engage in any activity prohibited to a State Party under this Treaty;

• Seek or receive any assistance, in any way, from anyone to engage in any activity prohibited to a State Party under this Treaty; and

• Allow any stationing, installation or deployment of any nuclear weapons or other nuclear explosive devices in its territory or at any place under its jurisdiction or control.

WHO IS BOUND?

Under international law, a State Party must be a signatory to a treaty in order for it to be legally binding. Depending on the domestic legal structure, for some countries like the United States, once a treaty is signed it automatically holds equivalent status to federal legislation. In Australia, the Treaty must be ratified at an international and domestic level and legislation must be enacted to give domestic effect to the Treaty. Of the Five Eyes nations comprising Australia, Canada, New Zealand, the United Kingdom and the United States, New Zealand is the only State Party to ratify the Treaty. Interestingly, countries like Belgium, Italy and France appear to have opted instead to introduce domestic laws prohibiting activities in relation to nuclear weapons rather than support or adopt the Treaty itself.

Under Article 5 of the Treaty, State Parties must "take all appropriate legal, administrative and other measures, including the imposition of penal sanctions, to prevent and suppress any activity prohibited to a State Party under this Treaty undertaken by persons or on territory under its jurisdiction or control". It is therefore expected that State Parties to the Treaty will take necessary steps to ensure that all activities above are unlawful in their own country.

While India and Australia are not signatories to the Treaty, unless the prohibition of nuclear weapons rises to the level of customary international law (which is exceedingly uncommon), the Treaty is not binding on these countries. Important social, political and security questions arise as to whether the Treaty will be adopted, formally, or informally by the creation of domestic laws to prohibit the underlying conduct reflected in the Treaty. Each country will need to consider its own position and hopefully, a broader regional and world view. Traditional flashpoints for India between Pakistan and China suggest support for the Treaty within India may be more challenging.

COMPLICITY AND EFFECTS ON GLOBAL MARKETS

Although the Treaty is binding on State Parties rather than private companies and businesses, the private market for developing nuclear weapons will nevertheless be impacted because of the heightened scrutiny by State Parties and investor groups of companies manufacturing or financing nuclear weapons, and, more pointedly, the process of investing in businesses that engage in that prohibited activity. This is because the financing of nuclear weapons is likely to fall within the scope of the Treaty – specifically to "assist, encourage or induce, in any way, anyone to engage in any activity prohibited to a State Party under this Treaty".

The international laws of complicity (which is effectively accessorial liability in an international context), may seek to untangle the web that is the nuclear arms trade. Under Article 16 of the Articles on State Responsibility, a State that aids or assists another State in the commission of an internationally wrongful act by the recipient State is internationally responsible, where certain conditions are fulfilled. The laws of complicity is another avenue in which the proliferation, manufacturing and bringing about of nuclear weapons would be disavowed even for States that are not signatories to the Treaty.

LEGAL OBLIGATIONS FOR COMPANIES IN AUSTRALIA AND INDIA

Both Australia and India have comprehensive corporate laws developed by the common law (largely inherited from the UK) and through the introduction of domestic legislative (statutory) regimes, including fiduciary duties owed to the company. If breached, individuals may be held accountable for conduct that constitutes criminal and civil offenses including sanctions (fines and/or imprisonment) disqualification and commercial consequences (loss of profits due to reputational damage etc.).

In Australia, under the Corporations Act 2001() directors have four main statutory duties (which largely reflect the old common law duties):

• Care and diligence: a director must act with the degree of care and diligence that a reasonable person might be expected to show in the role (section 180);

• Good faith: a director must act in good faith in the best interests of the company and for a proper purpose (section 181);

• Cannot improperly use position: directors must not improperly use their position to gain an advantage for themselves or someone else, or to the detriment to the company (section 182); and

• Cannot improperly use information: directors cannot improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else, or to the detriment to the company.

In India, under the Companies Act 2013, similar fiduciary obligations exist for directors. Section 166 states:

(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.

(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either for himself or for his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.

In addition to specific directors' duties above, a listed company (in both India and Australia) has an obligation to continuously disclose information which may have an effect on its market price or value. It is possible that if news were to break that a company has had a hand in the proliferation of nuclear weapons, and such news was not otherwise disclosed to investors and resulted in a share price drop, both the company and individual directors (and in some cases, officers) could be held personally liable and be sued. Similar trends are currently occurring in the climate change space, with lobby and investment groups successfully taking superannuation funds, governments, corporations and banks to court due to failures in disclosing the material risks of climate change to the business and the investors' interest in a company.

More broadly, if Australian and/or Indian companies are involved in the business of manufacturing nuclear weapons (e.g. developing launching systems) and have established headquarters or subsidiary companies in a country that is a State Party to the Treaty, that activity may be regarded as unlawful and the company risks falling foul of domestic laws, as well as giving rise to significant reputational risks.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES: THE SAVVY INVESTOR

The last decade has seen huge movement by investor groups in reshuffling ('divesting') large sums of money from investment funds that are not aligned with particular environmental, social and governance (ESG) policies. The most prominent example of this is fossil fuel divestment, where lobby groups publish details of a business's investment portfolio and mount pressure for that organization to divest its funds away from fossil fuel companies. For example in April 2020, after significant pressure and protest across London, Oxford University announced landmark plans to divest its endowment formally from the fossil fuel industry and ask its endowment managers to engage with fund managers to request evidence of net zero carbon business plans across their portfolios. In Australia, banks have been subjected to campaigns not to finance large-scale industrial (coal mining) operations, with the Adani mine (from India, the most prominent). Members of the Australian Government and the media still deny climate change and resist what is likely to be an inevitable transition from carbon-heavy fossil fuels to renewable energy options. They are even seeking to hold parliamentary inquiries, forcing companies to justify their decisions not to fund, finance or invest in fossil fuel heavy projects which they believe are necessary to secure limited job opportunities. Times may be changing, but governments are often the last to change after business has moved ahead of its own accord, prompted by the watchful eye of critical investors on lacklustre ESG policies.

One particular organization releases yearly profiles of financial institutions and businesses that have "adopted, implemented and published a policy that comprehensively prevents any financial involvement in nuclear weapon producing companies". Don't Bank on the Bomb 2019 Hall of Fame list includes three financial institutions in Australia: Australian Ethical, Bank Australia and Future Super (there were none listed for India). Separately, they keep a database of financial institutions that are involved in the nuclear weapons industry (with investments of up to US$750 billion), which includes major banks in both Australia and India, as well as insurance and private corporations in India.

TIMES THEY ARE A-CHANGING

It is entirely plausible that investor initiatives for the prohibition of nuclear weapons will increase now that the Treaty is legally binding on State Parties. This in turn is likely to lift the lid on otherwise concealed money trails for investment in the development of nuclear weapons and increase the level of accountability and transparency in the industry. Due to the laws of complicity and prohibition of crimes under international and domestic laws, it may be the case that individual officers of a company may be held liable for the use or threat of nuclear weapons. For now, the likely ripple will be one of transparency – now that State Parties are in the process of fully implementing domestic laws to give effect to the Treaty, companies should prepare for the reputational damage of much that might come to light if short-term business opportunities encourage them to continue to promote the indirect proliferation of nuclear weapons.