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Exclusions may simply be transferring a problem

Exclusions may simply be transferring a problem

03-02-2020 | Research

Do exclusions work? This tool is widely used by shareholders in taking a stand against an objectionable practice, such as producing tobacco or weapons. However, it simply transfers the problem from one owner to another and may have little effect on the firms in question, new research by Robeco shows.

  • David Blitz
    David
    Blitz
    Head of Quant Research
  • Laurens Swinkels
    Laurens
    Swinkels
    Researcher at Quant Research team, Robeco

Speed read

  • Exclusions transfer ownership from the concerned to unconcerned
  • Academic paper by Robeco researchers questions its usefulness
  • Using active ownership techniques may be much more effective 

As a major investor, Robeco commonly excludes companies whose products or behaviors cannot be changed through active ownership techniques such as engagement. Exclusions include companies making cluster bombs or cigarettes, serial polluters, and those immersed in corruption or human rights abuses.

However, once a company has been excluded, it is not possible to engage with it, meaning that its products or behaviors from that point go unchallenged. Generally, it is possible to engage over a behavior rather than a product, but some companies remain unresponsive to investor concerns. 

The arguments for and against exclusions are analyzed in a February 2020 academic paper published in the Journal of Portfolio Management entitled ‘Is Exclusion Effective? The article for the well-known investing magazine was authored by David Blitz, head of quantitative research at Robeco, and Laurens Swinkels, senior researcher and an assistant professor of finance at Erasmus University.

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Transfer of ownership

“Many believe that investors can contribute to a more sustainable world by divesting from firms with the worst sustainability profiles,” the authors say in the article. “But because exclusion is effectively a transfer of ownership from concerned to less-concerned investors, it is anything but obvious how this is supposed to lead to changes for the better in society.”

“For instance, if investor A sells off tobacco stocks to investor B, not a single cigarette fewer will be lit by smokers the next day. The effectiveness of an exclusion policy is typically not evaluated by assessing its impact in the real world, even though this is what really matters.”

“This article critically examined the various arguments for how exclusion might have a positive impact in the longer run. Rather than excluding firms, investors may well achieve more by exerting influence as an active shareholder through voting and engaging with firms.”

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