Ethical exclusions are becoming more refined

Originally, ethical exclusions in finance were relatively straightforward. Certain industries were considered inherently immoral: alcohol, tobacco, pornography, and so on. In recent years, however, the landscape has become more complex. Exclusions within responsible investing have become more targeted and now also include behavioral filters applied at the company level (see the September 2025 column “The rise of norms-based exclusions”). Several recent developments point to a strengthening of this trend.

Gradually, practitioners in sustainable finance are moving away from an essentialist approach—one centered on the idea that there are “good” and “bad” products—and adopting a more nuanced approach. This approach also takes into account not only how a product is used but also the practices of the companies involved, which are evaluated on a case-by-case basis and within their specific context. It reflects the recognition that products and services can be used in various ways, some of which are considered legitimate, while others viewed as contrary to international standards such as human rights, international humanitarian law, or climate change.

Enhanced due diligence

The shift in perceptions regarding the defence sector is particularly striking. Since Russia’s invasion of Ukraine in 2022, many professional investors have relaxed their exclusions relating to this sector, citing the right to defend Ukraine and Europe. That said, investors remain vigilant about how weapons are used. For example, the organizations Investor Advocates for Social Justice and Investor Alliance for Human Rights urged financial institutions to write to major arms dealers, calling for enhanced due diligence over how their products are deployed.

The sustainable finance sector is also increasingly concerned about the technology industry and the dual-use nature of digital innovation. Data centers, algorithms, and artificial intelligence are expanding their role in military operations. As one expert interviewed recently by Responsible Investor put it: “Suddenly there’s this exposure to defence through AI, and investors are exposed to defence without knowing they’re exposed to defence.”  

Leading tech companies

The Norwegian sovereign wealth fund, one of the world’s largest institutional investors, has been applying exclusion criteria for several years. Last year, the Council on Ethics that advises the fund was preparing to assess the role of technology companies in light of the growing use of their products for military purposes. Could the tech giants (Alphabet, Microsoft, Amazon, etc.), which account for nearly 10% of the fund’s total value, be excluded on ethical grounds?

This prospect is causing concern among Norwegian political leaders. In line with the finance minister’s position, the parliament voted in the fall of 2025 to ensure that the sovereign wealth fund remains highly diversified and continues to aim for the highest possible return. It also called for a review of the fund’s ethical guidelines.

For the government, the challenge is to strike a balance between the fund’s financial mission and Norway’s obligations under international law. This quest for balance highlights the central dilemma inherent in sustainable finance: how can one generate substantial returns while do good at the same time?

Lack of effort

The growing complexity of ethical exclusions also affects the energy sector. A few years ago, a binary approach was generally the norm: either all oil companies were excluded (sector-wide exclusions), or none were. Today, the picture is more nuanced: as indicated by regular monitoring conducted by Covalence, we are seeing more and more oil companies being placed on exclusion lists based on standards (behavioral exclusions). The reason for these exclusions is not the product itself—oil—but the fact that these companies lack a credible energy transition consistent with the Paris Climate Agreement.

As the head of the UK branch of BlackRock (the world’s largest asset manager) noted, institutional investors such as pension funds want “more subtle” products: fewer exclusions and sector-specific biases, and a focus on the “right” companies within each sector.

Impact on performance

Put simply, we are seeing a decline in sector-based exclusions (essentialist, static, apolitical) and a rise in behavioral exclusions (pragmatic, dynamic, geopolitical). The impact of exclusions on returns certainly plays a role in this shift. In this respect, the latest annual report from the Norwegian sovereign wealth fund is instructive (Responsible Investment 2025 – Government Pension Fund Global, February 2026).

The Norwegian sovereign wealth fund has calculated that sector-based exclusions (based on products) have cost it 3.5% in returns over the past 20 years (compared to a strategy without exclusions). By contrast, behavioral exclusions (based on standards) have generated in a 1.1% outperformance over the same period (the exclusion of companies involved in serious environmental damage has played a particularly positive role). This may reassure the financial community about how ethical exclusions are evolving within sustainable investment.