The rise of norms-based exclusions

Sector-based exclusions represent the oldest form of responsible investment. This approach involves refraining from investing in industries considered immoral — such as tobacco, gambling, arms, and fossil fuels. More recently, however, a lesser-known approach, norms-based exclusions, has expeditiously come to the fore. Instead of targeting entire industries, norms-based exclusions hone in on corporate practices that deviate from international standards of social responsibility (UN, OECD). Recent events clearly illustrate this shift. 

Amid calls for European states to bolster their defence capabilities, financial institutions are beginning to relax their investment policies on arms-related investments. Many are now opting for behavioural criteria over blanket sectoral exclusions. For example, the Swedish bank SEB recently changed its policy to allow investments in the arms industry, provided the companies involved implement robust human rights due diligence in their sales and export activities. Similarly, Mirova, a sustainable investment subsidiary of France's Natixis, has just published a report clarifying its position on defence: ‘No sectoral exclusion as a matter of principle, but a demanding policy of minimum standards.’

The Israeli-Palestinian conflict provides a second illustration of the current rise in norms-based exclusions. While attitudes towards the defence investment are somewhat softening in the European context, major institutional investors are simultaneously deciding to exclude arms manufacturers whose products are utilised by the Israeli military in ways deemed to violate international law. 

Beyond armament

The movement extends beyond military equipment and can affect sectors such as tourism, finance, and construction. In August, the Danish pension fund PBU announced its withdrawal from Booking, Airbnb, and Expedia due to their involvement in Israeli settlements in the West Bank. Similarly, Norway’s sovereign wealth fund has recently added several Israeli banks and the American company Caterpillar to its exclusions list. 

A third example of norms-based exclusion relates to the energy transition. This summer, Danske Bank Asset Management announced a significant reduction of its investment universe in oil, gas, and coal, narrowing it down to 270 companies and divesting from 1,700 companies that lack carbon emission reduction targets aligned with the Paris Climate Agreement. The Danish asset manager remains invested in fossil fuels, but in a much more targeted and selective manner. 

Norms-based exclusions are mainly practised in Europe, particularly in the Nordic countries, the Netherlands, Switzerland, as well as in Canada and Japan. In stark contrast, this approach is virtually non-existent in the United States, presenting a compelling area for research.  

Complex challenge

Behavioural exclusions represent a complex challenge for asset owners and managers. Which standards should be used as a reference? How should a threshold for violations of environmental, social, and governance (ESG) standards be defined? How can criteria be developed that are both stable and replicable? This is a delicate exercise, particularly as ESG controversies evolve over time in terms of intensity and polarity, as we observe on a daily basis at Covalence.

Increasingly, investors are managing norms-based exclusions in coherence with their shareholder engagement strategies. Exclusion may then follow when dialogue with a company fails to produce results, typically after an escalation process. This work requires extensive data and depends on a high level of transparency. Allianz GI is among the asset managers to have recently updated their investment policy on defence; it has launched an engagement programme with the companies concerned to better document the use of their products and the destination of their exports.

Ripple effect

From a sustainable development perspective, what are the advantages of norms-based exclusions that are made public? Firstly, they have a knock-on effect: while the Norwegian sovereign wealth fund directly holds 1.5% of the capital of all listed companies worldwide, the indirect influence of its exclusion list affects between 4% and more than 10% of total assets under management, as many professional investors take its list into account. In Switzerland, the exclusion list of the Swiss Association for Responsible Investment, which represents major pension funds, is similarly followed and replicated by third parties.

Secondly, norms-based exclusions have the potential to strengthen international law through economic and financial mechanisms, possibly compensating for certain limitations observed in the application of international law via traditional channels. Finally, it is important to highlight the significant role of civil society in alerting, raising awareness, and campaigning—efforts that underpin the adoption of norms-based exclusions. Insured persons, trade unions, political parties, and non-governmental organisations find in this area an additional means of participating in our democracies.

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