Exclusion strategies in sustainable investments

In the sustainable sphere, investments are selected using various investment strategies. Exclusion strategies are the first step in creating highly sustainable portfolios.

98
© Mathieu Stern on Unsplash

In the sustainable sphere, investments are selected using various investment strategies. The first and simplest approach to creating a sustainable portfolio is to apply filters against benchmark indices (each fund generally has a benchmark index in the market against which the performance and riskiness of the fund can be compared). This exclusion approach is also known as “negative screening” because it eliminates from the universe of securities available on the market those that do not meet certain criteria. Let’s see which ones.

Black-list or faith-based filtering
This strategy follows the principle of ‘do no harm’ and in fact originated long before the term sustainable was coined. In fact, these are filters that were applied in investment funds that were called ‘faith-based’: these funds do not invest in companies that profit from alcohol, firearms, tobacco, abortion products, adult entertainment, unconventional weapons, gambling, furs, etc. They were in fact the first ethical funds that emerged in the 1960s and 1970s to offer even those who were believers the opportunity to invest in ethical products. They were in fact the first ethical funds created in the 1960s and 1970s to offer believers the opportunity to invest in products that respected the principles of their religion. The same criteria were later extended to so-called ethical funds (no longer linked to a specific faith).

Norm-based screening
In this case, companies that do not adhere to international norms and/or conventions/standards, such as UNICEF (Convention on the Rights of the Child) – UN Global Compact Principles – OECD Guidelines for Multinational Enterprises – UN Guiding Principles on Business and Human Rights, are excluded from the set of companies belonging to a given index: – UNICEF (Convention on the Rights of the Child) – United Nations Global Compact Principles – OECD Guidelines for Multinational Enterprises – International Labour Organisation Convention – United Nations Guiding Principles on Business and Human Rights – UNHCR (United Nations Refugee Agency). The exclusion of companies that do not adhere to these principles takes place a priori, without even having assessed the economic aspect of the investment.

SRI filter (socially responsible investment)
Screening in this case consists of analysing the behaviour of companies in a portfolio of securities according to environmental and/or social criteria. Environmental factors are examined, analysing various parameters such as how much carbon/greenhouse gas a company produces or how much and what kind of waste it produces. On the other hand, the social impacts and working practices of a company are analysed by looking at the health and safety of workers, how different genders, LGBT and minorities are treated in the workplace, and the working practices of the suppliers they use. In addition, some filters can measure the impact of a company’s products or services on society as a whole. If the company’s impact on one or more of these areas is negative, it may be decided to exclude it from the portfolio even if it is a company with a significant market weight.

Exclusion strategies are the first step in creating highly sustainable portfolios: once the filter has been applied to the reference index, a portfolio with fewer names but a higher level of sustainability is obtained compared to the starting index.

Subscribe to our newsletter
Support SmartGreen Post with a donation!