To exclude or not exclude?

Excluding investments in companies or industries can limit harm and help to align your investments with your values and beliefs. However, it’s important to consider both the pros and cons. In this blog, we review the history of exclusions, get into the pros and cons of exclusions and talk about where and how we apply exclusions at ASB.

An investment exclusion is a decision not to invest in activities that are deemed harmful, unethical, or in breach of laws or regulations. This is sometimes called negative screening. Exclusions can be company-specific, applied to business activities (e.g. whaling), industries (e.g. fossil fuel production), or even geographies (e.g. Russian Federation securities).

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.

The pros:

• 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.

The cons:

• 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.

At ASB, we have an exclusion framework for assessing whether to exclude investments or industries.

When deciding whether to exclude an investment, we consider things such as if international conventions oppose, New Zealand laws prohibit investment or if the majority of our customers that we survey have a strong desire not to invest in it or its industry.

We currently exclude, where possible, the following investments:

• Controversial weapons
• Banned civilian firearms
  
• Tobacco and tobacco alternatives manufacturing
  
• Whale meat processing
  
• Fossil fuel producers
  
• Russian Federation securities¹
  
• Companies assessed as violating global standards
  

With help from our research provider, we create an exclusions list every three months (or more frequently if required) of our excluded companies and provide this to our underlying managers. We then regularly monitor our holdings against the exclusions list.

We publish our exclusions list on our website. You can find this and more information about our approach on our Responsible Investing webpage.

Our Positive Impact Funds invest in third-party managed funds which have their own exclusion policies and application. To find out more about our exclusion policies, definitions and application, including the Positive Impact Funds, see our Statement of Investment Policy and Objectives for the ASB KiwiSaver Scheme or ASB Investment Funds.

¹Some of the funds have exposure to a small number of securities issued in Russia that are subject to sanctions and cannot currently be divested. 

Interests in the ASB KiwiSaver Scheme and ASB Investment Funds (Schemes) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides administration and distribution services for the Schemes. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including possible loss of income and principal invested. For more information see the ASB KiwiSaver Scheme Product Disclosure Statement or the ASB Investment Funds Product Disclosure Statement available from this website and the register of offers of financial products at www.disclose-register.companiesoffice.govt.nz (search for ASB).