Engagement vs. Exclusion: What are the Differences? | ESG Explainer

What does "engagement vs exclusion" mean?

Engagement and exclusion are two ways to approach responsible investing and sustainability strategies within the context of environmental, social, and governance, or ESG, practices.

Engagement, also known as stewardship, involves directly encouraging companies to adopt more sustainable and responsible practices to bring about positive change.

This can be done through dialogue, or through advocacy, sometimes called shareholder activism. Shareholders propose resolutions or advocate for changes during annual general meetings to address specific ESG issues.

Investors may also collaborate with stakeholders such as NGOs like Greenpeace and the World Wide Fund for Nature, industry groups, or local communities.

Exclusion means banning certain industries, sectors, or companies from an investment portfolio based on ethical or ESG criteria. This is sometimes referred to as negative screening or divestment. 

Exclusionary investors establish criteria to "screen out" companies involved in activities that contradict their values, for example tobacco, weapons or fossil fuels.

Exclusion addresses the belief that companies involved in certain industries might pose long-term financial risks due to regulatory changes or public sentiment.

Some investors may choose to use a combination of both approaches to achieve their ESG and sustainability goals.