History of exclusions
Not investing in certain businesses for ethical reasons can be traced back to the 18th Century when religious investors avoided putting their money into companies that conflicted with their beliefs, like alcohol, tobacco, gambling and weapons manufacturing.
Since then, exclusions have evolved and grown to include a wide range of things. There are companies who research and recommend investment exclusions to help with this.
In New Zealand, there are laws that specifically prohibit owning shares in companies involved in controversial weapons, whether directly or indirectly. Beyond this, however, local fund managers can decide what they exclude.
- Can limit harm. While debated, if investors avoid a company or business activity, it can make it harder for a company to borrow money. This can limit their ability to continue or grow without making changes to fix the issue investors are concerned about.
- Enables alignment with your values. Just as you might decide not to spend your money at a company whose actions you don’t agree with, you can also avoid investing in that company. It’s your money, and exclusions can help you to make sure your investments match your values and beliefs.
- Can lower risk. History shows some companies that haven’t addressed past problems, are likely to have further incidents. Future incidents can impact the value of the company, which then impacts your investment value. So, excluding companies with a bad track record can help prevent potential negative impacts on your investment.
- Restricts other responsible investing approaches. It is harder to make change when you don’t have a seat at the table. By excluding a company, you give up that seat and with it the ability to influence a company’s actions through engagement and voting at shareholder meetings.
- Limits the investment universe. Excluding any company or industry restricts what you can invest in. The outcome of this can be a more concentrated portfolio with different company and sector weights, ultimately reducing diversification compared to the broader market. Diversification is an important risk management tool used by most fund managers, as it limits the impact on your overall investment return of any one investment performing poorly.