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Ethical investment: using negative screens to avoid ‘sin stocks’ is a thing of the past



Regina Schwegler and Judith Reutimann, of Switzerland-based sustainability rating agency Inrate, discuss the role of exclusion screenings in sustainable investment.

Excluding certain stocks from an investment universe due to violation of minimum standards is a widely used practice for socially responsible investments (SRI). It can be valuable for financial, risk and sustainability reasons. However, exclusion screenings need to be complemented by more encompassing sustainability assessments to fully reflect relevant sustainability issues and investors’ values.

Exclusion screenings as an SRI approach

Exclusion screenings systematically exclude companies, sectors or countries from a permissible investment universe, if involved in certain activities. To this end, investors define specific exclusion criteria, the most common being weapons, alcohol, tobacco, nuclear energy and the violation of labour rights. Investors do not want to be associated with such activities because they involve high societal risks, serious human rights infringements or irreversible ecological damages.

From religious motivations to today’s SRI practice

Exclusion screenings are the oldest practice for SRI. Their roots date back to the Quakers – the Religious Society of Friends, founded in 1758 – who prohibited members from participating in the buying or selling of slaves and war efforts, because such practices contradicted their fundamental beliefs about peace and nonviolence.

In 1928, the first responsible investment fund, the US Pioneer fund, was launched. Strongly motivated by the prohibition era, it excluded investments in alcohol and tobacco.

During the civil rights and peace movements in the 1960s, excluding certain companies from investments began to be motivated by politics and public awareness for social topics. Later, the environmental movement of the 1970s and 80s brought about growing concerns over environmental degradation and limited natural resources.

Another milestone that contributed to the development of SRI was the groundbreaking report Our Common Future published by the United Nations’ Brundtland commission in 1987 and postulating ‘sustainable development’.

As sustainability came to the forefront of society, it slowly emerged as its own market for sustainable investments. In addition to exclusion screenings, broader sustainability assessment approaches that measure a company’s contribution to sustainable development also gained importance.

The practice of excluding certain stocks in order to avoid investing in so-called ‘black sheep’ has continually grown until today (see figure 1).

Figure 1. Source: Eurosif 2012

The role of exclusion screenings within the world of SRI

Today, exclusion screenings are an important element of SRI. Investors view exclusions as an investment tool to avoid criticism of their legitimacy and social usefulness. But should investors rely on exclusion screenings as their main SRI strategy? What role do exclusion screenings play within the world of SRI?

To answer these questions, we need to acknowledge that exclusions serve two main purposes within SRI:

– To measure a company’s sustainability impacts and encourage it to improve its sustainability performance
– To allow an investor to reflect their values, e.g. by avoiding investments that do not correspond with their belief systems

Exclusion screenings generally focus on issues with severe and often irreversible adverse sustainability impacts (e.g. infringement of fundamental human rights) or are associated with major or incalculable risks (e.g. nuclear energy production). Thus, exclusion screenings improve the sustainability impacts of investments.

However, they are not able to capture all relevant sustainability issues facing a company; they simply serve as minimum ethical standards, and as such focus on the highest sustainability risks.

Furthermore, exclusion screenings tend to apply criteria that are relatively easy to assess, such as alcohol, tobacco or gambling. Even though these issues are undoubtedly relevant, they tend to be overrated, compared to other relevant but more complex issues such as human rights. At the same time, exclusion screenings are hardly applicable to cover other highly relevant issues our society faces today, such as climate change, and the sustainable use of freshwater resources.

Similarly, exclusion screenings can only partly be used to fulfill the second purpose of SRI: to reflect an investor’s values. Asset owners mentioned a variety of reasons for the use of environmental, social and governance (ESG) criteria for their investments: from sustainable development to long-term risk management, protection of reputation and financial performance (see figure 2).

Although exclusion screenings are generally effective in evading important sustainability impacts and investment risks, relying solely only on them is not advisable. It bears the risk that investors overlook other relevant investment risks such as the carbon-intensity of an investment, and investment chances such as energy-efficient technologies.

Figure 2. Reasons to use ESG criteria with investments. Source: Novethic 2013.

Sustainability assessments and exclusion screenings

Inrate is aware of the above mentioned limits of exclusion screenings, and therefore combines them with further sustainability assessments.

The Swiss Raiffeisen Futura funds are based on Inrate’s sustainability ratings. The methodical approach combines a sustainability assessment (positive filter) which thoroughly determines a company’s contribution to sustainable development with an exclusion screening (negative filter) that guarantees no involvement in especially harmful products and activities.

The sustainability assessment of Schneider Electric SA for the Raiffeisen Futura Fonds illustrates the relevance of the two rating pillars that Inrate applies.

The company’s sustainability assessment indicates that the company is on the path to sustainability, with an overall sustainability performance above the average of its industry peers (environmental rating: 50% over average; social rating: 101% over average; see table 1).

Table 1. Source: Inrate 2014

The exclusion screenings around Schneider Electric reveal that the company currently has some minor involvements with exclusion criteria, because the company supplies products that can be used in the defence (dual use goods) and nuclear energy sectors. But turnover generated from sales of such products remain below the thresholds applied for exclusion.

However, in the past the company provided crucial parts for nuclear weapon systems and could potentially do so again in the future. Even when generating a low share of total turnover, such services are considered a significant involvement and therefore used to trigger an exclusion of the company from the investment universe.

The example of Schneider Electric shows that an exclusion screening reveals highly relevant, but much focused information. In contrast to that, a sustainability assessment draws a more complex picture of the company, and reveals valuable information for an investor. The combination of both methodological approaches – exclusion screening and sustainability assessment – will in most cases be best suited to an investor’s needs.

Table 2. Source: Inrate 2014

Exclusion screenings are best combined with sustainability assessments

Generally speaking, exclusion screenings are effective tools in evading important sustainability impacts and investment risks. However, they are limited when it comes to reflect complex but relevant sustainability aspects of a portfolio and to fully reflect investor values.  For these reasons, investors have to overcome the possible temptation of using them as half-baked solutions.

Applying exclusion screenings successfully requires that they are used the correct way:

– As part of a coherent and formal responsible investment position
– Based on criteria that are scientifically founded, purposefully selected and consistently applied
– Ideally in combination with a more holistic sustainability assessment that is able to assess complex sustainability issues in more detail

Regina Schwegler and Judith Reutimann are senior analysts at Switzerland-based sustainability rating agency Inrate. This article is a summary of their recent paper, Exclusion Screenings: Highways or dead ends? It’s your choice!, where you can find references for all of the above.

Further reading:

From ethics to sustainability: shifting the investment debate for 2014

One day soon, we hope all investment will be sustainable, responsible and ethical – before it is too late

Sustainable investment is about optimisation, not maximisation

‘Saints’ reap better returns than ‘sinners’ in new sustainable investment analysis

The Guide to Sustainable Investment 2014


Will Self-Driving Cars Be Better for the Environment?



self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo |

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.


Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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New Zealand to Switch to Fully Renewable Energy by 2035



renewable energy policy
Shutterstock Licensed Photo - By Eviart /

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.


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