Evidence that Western-made microelectronics are being used in Russian weapons systems has prompted a ramp-up in investor engagement with manufacturers.

Sam Jones, president and co-founder of the Heartland Initiative, tells Responsible Investor that investors wanted to discuss the findings of the report. They also wanted to understand more about the firms’ human rights-related policies, practices and governance measures, and discuss incremental changes the companies could make to limit their products from reaching prohibited end-users.

While RUSI’s report and the Russian invasion of Ukraine catalysed investor action and focus on semiconductors, Jones says, semiconductor companies’ risks “extend well beyond this one conflict”. It was therefore decided that engagements should focus on broader policy.

“The number and intensity of conflicts are on the rise globally and military drones, which are less expensive and widely accessible by smaller states, are the backbone of geopolitical conflict,” Jones tells RI. “As semiconductors and other microelectronics are indispensable to these weapons systems, companies’ conflict risk exposures are only going to grow.”

Ideally, firms would focus on improving their know-your-customer (KYC) due diligence practices, including through the integration of human rights criteria, says Jones.

He also advocates the use of red flag indicators to identify third parties being used to evade sanctions, as well as coordination with civil society organisations and supply-chain research firms that specialise in tracing these components to bad actors in Russia, Iran and elsewhere.

“It’s also about companies better integrating their compliance, human rights, operations and sales units instead of keeping them siloed, and selecting board members with relevant human rights and conflict expertise,” he says.

So far, Jones reports limited success with the target firms.

He notes that all three have largely relied on four central arguments: they are compliant with all relevant sanctions and export controls; the majority of the chips in question are off-the-shelf products available in household appliances, as opposed to dual-use items that require additional due diligence; they are largely “legacy” chips that have been on the market for years so they cannot track them; and it is not reasonable to expect 100 percent transparency and traceability.

“Heartland and the investors are not disagreeing with the above,” says Jones. “But a compliance-only approach is clearly inadequate given the sheer number of new, dual-use components that are still making their way to Russian and Iranian weapons systems used in violation of international law.

“Regulatory compliance is the floor, not the ceiling – especially in light of evolving sanctions and KYC regulations, ongoing public reporting resulting in reputational risk and the companies’ responsibilities under the UN Guiding Principles on Business and Human Rights, which they claim to uphold.”