Civilian application of drone technology has increased dramatically in recent years. The burgeoning civilian opportunities are a potential boon for investors, who view this emerging market as one that will expand long into the future, notwithstanding current and pending regulation of the industry. VCs are eager to get in on a piece of the action.
Notably, drones have historically been used primarily by the military, and this usage continues to be the primary driver of the market for drones and drone technology today. Up to 87 countries are currently using some form of drone in a military capacity. The United States leads the supply market for military drones, followed by Israel, which is the world’s largest exporter of drones.
One sign of the changes to come occurred in December 2013, when Amazon CEO Jeff Bezos revealed a program to create a delivery-by-drone service called Amazon “Prime Air.” In August of 2014, Amazon urged the U.S. Department of Transportation, which currently bans outdoor testing or use of drones by commercial entities, to grant it an exemption that would allow it to develop the program.
While Amazon’s announcement and efforts to develop its new program have been widely-publicized, other quieter civilian applications have been contemplated. Over the next few years, the FAA is “expected to license the use of tens of thousands of commercial drones for varied applications like crop monitoring, real estate sales, land use management, news reporting and search-and-rescue missions,” according to ComputerWorld. Law enforcement usage, such as for traffic management and fugitive tracking, will also rise.
Astute investors should first recognize, however, the potential human rights related issues connected to drone use and technology before diving into the deep end of this market. In May 2014, Sustainalytics published a report, Drones & Human Rights: Emerging Issues for Investors, outlining the major risks investors face in the drone market. It lists three main categories of risks:
- The increasing possibility of lethal autonomous weapons (LARs) in the form of drones;
- The lethal use of drones outside of declared war zones; and
- Concerns over privacy and information threats
LARs are fully autonomous robots that have the capacity to eliminate human (or other) targets without human input or review. The moral and legal consequences of this type of technology are troubling, as these “killer robots” would be unable to distinguish between combatants and civilians, or judge the proportionality of a military action. This is particularly true for a drone that may be flying thousands of feet above ground. For these reasons, LARs have become a major focus of human rights organizations. For example, a global coalition of NGOs called the Campaign to Stop Killer Robots emerged in 2012, and has rapidly picked up endorsements from scientists, faith leaders and policymakers. And the private sector is taking note: according to Human Rights Watch, in August of 2014, a Canadian company, Clearpath Robotics, supported the campaign in its pledge to abstain from the development and manufacture of LARs.
Another major risk for investors in the drone market is the thorny legal and moral issue of targeting killings in non-conflict zones. States that justify these drone strikes claim that they are effective counter-terrorism but their use still falls within a legal gray zone, as indicated in a March 2014 U.N. Human Rights Council report, which states there “no clear international consensus” on the legality of these strikes. Much attention has been focused on the U.S. use of drones in countries with which no formal war has been declared, such as Pakistan, Somalia and Yemen. The social and psychological effect on communities affected by drone strikes is concerning and human rights organizations heavily critique the practice.
Finally, novel issues related to privacy arise in the use of drones, which are built for surveillance and data collection. This is particularly difficult to monitor in the realm of drones because of the public nature of air space. Civil society members, including NGOs and academics, have pushed for the formulation of rules to govern the privacy concerns that drones threaten in the U.S. In 2013, for example, Idaho enacted a law requiring warrants for the use of drones by law enforcement and established guidelines for use by private citizens. Today, a large majority of U.S. states have passed or are considering drone legislation in because of privacy concerns. E.U. Member States also impose varying levels of regulation on the civilian use of drones, and the European Commission has published a roadmap for long-term standardized regulation across Member States. A related risk stems from vulnerability of drones to hacking. Even if regulated and used “appropriately,” data stored by drones could be at risk if not secured.
The risks outlined above can pose legal, reputational and economic risks for companies and investors. While the technology is certain to continue developing, regulatory regimes could potentially “affect returns on research and development in the medium and long term.” Companies for which drone production and technology is a major focus will, of course, feel any effects more intensely than the large defense companies for which drone production is a small portion of their business.
Because of realized and potential violations of human rights that drone use can cause, companies that develop and produce such technologies, and their investors, are exposed to public criticism and reputational risk. For example, in November 2012, the NGO Reprieve called upon large insurers and pension funds to divest from firms producing combat drones.
Beyond civil society pressure, frameworks such as the U.N. Guiding Principles on Business Human Rights call on companies to operate with respect for human rights and to avoid complicity in human rights violations.
Sustainalytics makes three recommendations for limiting exposure to human rights and reputational risks:
- Keep informed related to new risks and regulatory developments;
- Develop a position on uses and users of drones, defining high-risk and low-risk types of both; and
- Engage with producers of drones and drone technology to address the risk factors to which companies are exposed.
Investors should also conduct due diligence in determining whether drone producers are linked to human rights violations. This includes “efforts to identify the countries to which a company has sold drones, where they are being used, what steps a company is taking to assess the possible adverse human rights impacts of drone sales, and what policies they have in place to define responsible behaviour with respect to drone use in accordance with international law.” The Sustainalytics report includes an annex that includes a list of questions that investors can pose to drone producers in efforts to monitor, mitigate, and address human rights risks involved in drone production.
Ultimately, drones have potential to provide unique and valuable services for military and civilian purposes alike. Awareness of the human rights implications, in addition to potential regulatory and reputational concerns, must come first.