Exclusion policy: finding a happy medium

In June 2023, WeeFin published the Sustainable Finance barometer in order to measure the level of ambition and transparency of ESG funds by studying the ESG communication documents of a panel of 50 Article 8 and 9 funds.

Exclusion policies, a pillar of financial sustainability strategies, had also received particular attention from our teams. The results were rather mixed, as :

• 68% of Article 8 funds had no exclusions, or only non-committal thresholds, on coal or non-conventional oil and gas.
• 56% of Article 9 funds with an environmental objective did not follow an ambitious sectoral exclusion policy for coal or non-conventional oil and gas.  

This year, new analyses have been carried out, and while the balance sheet seems to be improving with players who have been able to reinforce their exclusions, two new paradigms are emerging:

1. Binary exclusions (based solely on % of sales) seem to be called into question, as they would not be effective in pushing companies to adopt more virtuous practices.
2. Exclusion policies are seen more as the last nut, the final stage in a long process aimed at transitioning players, notably through commitment.

To take these developments into account, we have modified our analysis methodology. We have retained the review of exclusion thresholds, but have added two new dimensions, based on the recommendations of the NGO Reclaim Finance. In the fossil fuel sector, for example, we have extended the scope of our analysis to include the exclusion of the following companies:

• developing new capacities or with expansion plans
• not having provided for a gradual phase-out of coal

Findings:

• 36% of funds surveyed do not exclude companies involved in new coal-related projects
• 76% of funds do not exclude companies involved in new oil & gas projects

How to explain these results?

This strategic trade-off may be due to operational constraints. As the exclusion policy is often defined at management company level, the requirements are the same for all funds. As a result, the thresholds set are generally low enough not to penalize the strategies of non-ESG funds. This has a negative effect on thematic or impact funds, whose exclusions therefore appear to be less restrictive.

In addition, access to quality data poses a problem for players, who use private or public sources, but do not all have the appropriate tools to integrate (via an automated matching system with customizable filiation rules), control and steer them at the level of each of the funds they manage.

Finally, our study also revealed a difference in the maturity of exclusions for coal compared to oil and gas. This observation is even truer for social or biodiversity-related themes, as the figures below, collected as part of an analysis co-conducted by WeeFin and Ostrum Asset Management, demonstrate. So, the more players wish to adopt sophisticated exclusion policies covering a broad spectrum of environmental and social issues, the more they need to be able to access reliable data, tools and in-depth expertise to process them.

Existence of a thematic exclusion policy

Source: co-analysis by Ostrum AM and WeeFin of the exclusion policies of 25 asset management companies and insurers.

How can I make progress?

Expertise

• Identify the themes and perimeters of exclusion according to 1) the values & convictions of the management company and those of its clients, 2) the assets held, the risks and impacts to which they expose the management company, and 3) the type of management, assets and geographical zones, in order to define exclusion criteria adapted to each type of fund.

• Take better account of the notion of companies in transition (know how to assess robust transition plans through, in particular, intermediate milestones and a progress monitoring framework) and therefore know how to integrate exclusions into the issuers' commitment process.

• Identify the sustainability objectives being promoted and implement exclusion policies adapted to them. For example, if you are promoting a commitment to protecting nature, then it will be important to integrate associated themes (deforestation, pesticides, etc.) into your exclusions.

Data

• Use several indicators, not just % of sales, in line with the sector's issues and covering the entire value chain

• Use and test different data sources, selecting them according to history, coverage rate and level of controls applied.

• Evolve thresholds over time to encourage best practice

Tools

• Automate controls and implement an exclusion alert system to ensure continuous monitoring of the exclusion strategy so that it is aligned with the fund's sustainable objective.

• Use a tool to link indicators for monitoring corporate transition plans with shareholder engagement and exclusions

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