7. Exclusions Jonathan Horlacher, CFA
Financial Analyst, Credit Suisse (Switzerland)
Antonios Koutsoukis, CFA
Financial Analyst, Credit Suisse (Switzerland)
The exclusion approach (also known as negative screening) refers to the deliberate exclusion of industries, business activities, or products from an investment portfolio based on values, ethics, or principles. Typically, investors define a set of exclusion criteria and apply these through negative screening, either on their existing assets or as part of individual investment decisions. There are two main types of exclusion approaches: unconditional exclusions of business activities incompatible with the investor’s values (values-based screening/exclusions) and conditional exclusions of companies based on breaches of certain global ESG standards, such as UN Global Compact or ILO conventions (norms-based screening/exclusions). The former is currently by far the most established and widely used approach to sustainable investing: In 2016, USD15.0 trillion, or 17% of total managed assets, applied a valuesbased exclusion screen according to the Global Sustainable Investing Alliance (GSIA).1 In Switzerland, investment portfolios worth several hundred billion CHF apply some sort of screens that go beyond the legally required exclusions (i.e., internationally banned weapons).2 The more complex norms-based screening approach is applied to USD6.2 trillion globally, most of which are European assets, and CHF164 billion in Switzerland. Exclusion approaches often represent a starting point for institutional investors on which more complex forms of sustainable investing build. In some cases (such as antipersonnel mines), exclusions can even be legally required in certain jurisdictions, including Switzerland (see also chapter 5 on regulatory requirements).
Ethics, Values, and Investment Objectives The decision to deliberately not invest in certain industries opens up a debate due to conflicting priorities. On the one hand, any trust or pension fund has the fiduciary duty to pursue the best possible financial performance for its beneficiaries; on the other hand, broader social and environmental concerns are increasingly also taken into account. Early examples of exclusion include the divestment campaigns against the Apartheid regime in South Africa in the 1980s or against tobacco firms in the 1990s. Over time, other controversies 38
