Which investments are avoided for ethical reasons is a central question of sustainable investing. Its roots go way back to the 20th century, when religiously orientated investors avoided investing in companies associated with gambling, pornography, weapons or alcohol. In the 1960s and 1970s, the practice took on a political dimension when certain investors began to avoid companies because of their involvement in the Vietnam War or apartheid in South Africa. Checking potential portfolio investments for compliance with international norms and standards such as the UN Global Compact or the norms of the International Labour Organization (ILO) is another important basis for exclusion decisions that relate to the behaviour of companies (as opposed to their specific field of activity).
There are good reasons in favour of standards-based screening and industry exclusions. An important motivation for this is ethical coherence, the alignment of personal (or institutional) values with investment decisions, which can be achieved through exclusions. Avoiding investments in sensitive sectors or undesirable corporate practices is also an effective risk management tool. On the one hand, reputational risks for investors can be minimised, while on the other it can be assumed that companies that are committed to complying with certain standards will themselves have more robust risk management systems. Finally, the signalling effect with regard to the promotion of sustainable practices should not be underestimated.
However, there is also justified criticism. From the perspective of the professional portfolio manager, exclusions limit diversification, potentially increasing investment risk without financial compensation. Sector exclusions in particular can lead to missed opportunities if, for example, a company in an excluded sector develops innovative solutions (e.g. an oil producer that invests foresightedly in renewable energies). Finally, the real economic impact of exclusions on social or environmental change is controversial. There are good reasons to believe that dialogue with problematic companies via shareholder associations such as Ethos can be more effective than their exclusion.
In view of these arguments, it is very important to us that ethically orientated investing is not solely determined by the question of what NOT to invest in. My colleague Lukas Stücklin has summarised the factors we pay attention to instead - or rather: in addition - in the blog "How we implement sustainability".
Exclusions are and remain an important element of ethically inspired investment strategies. We also use a list of exclusions in our mandates. They are important to us, but we try to do justice to the idea of sustainable investing with a multi-dimensional approach. It is also important to us that a private individual or institution that wishes to incorporate more far-reaching ideas can do so in dialogue with Invethos. We will be happy to advise you on how a value proposition can be concretised.