Partial exclusions: A range of approaches

While many early responsible investment funds focused on full exclusion of certain sectors, more recently launched funds have generally taken more nuanced positions…

Over the past month we have assessed the policies of 301 European and US investors. Amongst these, we have found 61 that adhere to these revenue or activity-based exclusions for at least one sector they want to filter from the investment universe. Some of our findings include:

Relatively limited numbers of investors partially exclude nuclear

This likely reflects the more polarised nature of this source of energy generation amongst ESG investors. We found in our sample set only four investors that communicated thresholds for exclusions. Investors that have exclusionary polices for nuclear in place tend to fully exclude it regardless of the level of revenues from nuclear power.


Threshold for Nuclear 2022

Source: NatWest

Coal thresholds more permissive

Unsurprisingly coal features in many investors’ exclusionary thresholds (we identified 51 mentions). On average the applied revenue threshold is 19.4% - this compares to 12.2% for oil and gas. Using the revenue-based approach for coal and oil & gas suggests that investors believe some of these companies could be a part of the low-carbon transition as those companies shift to renewable energy investments and related activities therefore lowering the amount of revenues from oil and gas or coal. This may also mean that such accounts operate global funds and are cognisant of the reliance on coal in various emerging markets.


Thresholds for Coal and Oil & Gas 2022

Source: NatWest

Low thresholds for “sin” sectors

For investors adhering to more socially motivated exclusionary policies, such as tobacco and alcohol (19 and 5 investors respectively in our sample), revenue thresholds tend to be in the 1-5% range. This generally allows retailers to still be included in portfolios, while excluding the distillers and tobacco manufacturers.


Thresholds for Alcohol and Tobacco 2022

Source: NatWest

Thresholds show limited movement …

While there has been significant debate this year around a possible loosening of standards for certain sectors (such as defence and nuclear), we have found little evidence that this has impacted exclusionary policies of investors. We identified only six investors that made changes to their thresholds across different sectors, typically reducing thresholds by 5 percentage points, therefore potentially allowing more issuers in their investment universes.

…but changing technologies and views could result in further shifts

As industries, technologies and societal views develop, however, further shifts in thresholds may well occur. While less visible than investors announcing full exclusions or re-inclusions, they are an important undercurrent of where liquidity is flowing.

Clearly, there are no guarantees for unconditional investor support for any sector. 

Source: NatWest research, based on public statements and responsible investment policies communicated by European institutional investors.

*Thresholds can apply to both revenue and asset thresholds.

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