Avoidance

3 Key Takeaways

• Avoidance is an investment strategy that excludes certain assets or sectors based on ethical, social, or environmental concerns.
• It is also known as negative screening and is used to align investments with personal values.
• Avoidance can be applied to various areas, such as fossil fuels, tobacco, weapons, and human rights violations.

What is Avoidance?

Avoidance, in the context of investing, is a strategy where investors intentionally avoid investing in companies or industries that are deemed harmful or unethical. This approach is based on the belief that investment decisions can have a significant impact on society and the environment, and that investors have a responsibility to consider the broader consequences of their choices.

Importance of Avoidance

• Ethical Investing: Avoidance allows investors to align their portfolios with their personal values and ethical principles.
• Social and Environmental Impact: It can contribute to positive social and environmental change by directing capital away from harmful industries and towards more sustainable alternatives.
• Risk Management: Avoidance can be a form of risk management, as it helps investors avoid companies or sectors with potential reputational or regulatory risks.
• Financial Performance: Contrary to popular belief, avoidance does not necessarily lead to lower returns. Studies have shown that ethically screened portfolios can perform as well as, or even better than, conventional portfolios.

How Avoidance Works

1. Screening Criteria: Investors define their avoidance criteria based on their values and concerns. This could include excluding companies involved in fossil fuels, tobacco, weapons, human rights abuses, or other controversial activities.
2. Portfolio Construction: Investors select investments that meet their avoidance criteria, using various tools and resources such as sustainability ratings, ESG (environmental, social, and governance) reports, and third-party research.
3. Monitoring and Review: Investors regularly monitor their portfolios to ensure that they remain aligned with their values and adjust their holdings as needed.

Real-World Applications

Avoidance strategies are becoming increasingly popular among investors who are concerned about the social and environmental impact of their investments. Many institutional investors, such as pension funds and endowments, have adopted avoidance policies to exclude certain sectors or companies from their portfolios. Individual investors can also implement avoidance strategies by choosing investment funds or advisors that specialize in socially responsible investing (SRI) or environmental, social, and governance (ESG) investing.