Beyond Exclusion: Why Responsibility Requires Action

Varma has updated its Sustainability Programme to better reflect this changing environment. In the updated programme, we emphasise actions that truly make a difference, and our ability to create genuine, real-world impact. Responsible investing is not defined by what we choose not to do, but what we do, and the impact that those actions create.

Exclusion has long been been an integral part of responsible investment practices. It refers to an investor’s decision to refrain from investing in certain companies or sectors.

The roots of exclusion lie in religious and ethical principles, when churches and religious communities restricted investment in activities such as, tobacco, alcohol and gambling. From the mid-20th century onwards, political movements expanded exclusion to new areas, including weapons and later industries that contribute to climate change. Tobacco and controversial weapons have been excluded from Varma’s investments since the early 2000s, and investments related to coal have been limited since 2016.

When an investor excludes a company, it exits the ownership position entirely and forfeits the ability to influence the company through active ownership. In practice, however, the real-world impact of exclusion is often limited, particularly for listed equities, since the shares imply transfer from one owner to another. 

A more sustainable outcome would only emerge if ownership shifted from a less responsible investor to one that actively integrates sustainability considerations into its ownership practices. A recent economics study (Berk & van Binsbergen 2025) supports this conclusion.  According to the study, exclusion rarely affects companies’ operations or cost of capital when shares are merely traded between investors. Meaningful impact typically occurs only when a company seeks capital directly from the investors and the decision not to invest can genuinely hinder the company’s operations. 

“To have impact, ... socially conscious investors should invest and exercise their rights of control to change corporate policy. … When an investor chooses to sell a stock like a tobacco company, she necessarily sells it to another investor. Since this transaction simply exchanges one investor for another, it cannot directly impact how the company does business.”
– Berk & van Binsbergen, Journal of Financial Economics 2025

This observation applies broadly to all exclusions, whether they concern fossil fuels, weapons or tobacco. If we want to achieve real impact, exclusion alone is not sufficient.

The practice of exclusion reflects the ethical frameworks of the late 20th century, when responsible investment was largely defined by what investors chose not to do. Today, expectations have shifted, and investors are increasingly expected to engage actively in shaping societal outcomes.

Tobacco has been one of the most significant social issues of the last century, and its harmful impacts on society are undeniable. For this reason, excluding tobacco companies has long been a standard practice in responsible investment. 

In the 2020s, however, tobacco is no longer the only, and not necessarily even the most pressing, health and well-being concern from a responsible investment perspective. Issues such as, the impacts of social media on democracy and mental health, the ethical implications of artificial intelligence as well as the marginalisation of young people and the spread of disinformation have become central to the debate.

Responsible investment must stay in tune with the times and recognise new phenomena that are socially significant and which investors can influence.

Going forward, tobacco companies will be assessed under our due diligence framework for high-risk sectors. At the core of responsible investment is an investment decision that integrates financial analysis with sustainability considerations. Each decision is made on a case-by-case basis, taking into account financial prospects as well as the negative externalities associated with tobacco,  just as we do with other material sustainability issues. 

If the decision not to invest is made before the investment process begins, neither sustainability risks nor opportunities for active ownership and engagement can be properly assessed. For this reason, tobacco related risks and engagement opportunities  will be assessed as part of the standard investment process along with other key factors. This approach is not expected to result in an increase in exposure to tobacco companies.

Responsible investment is not a fixed state; it must evolve alongside society and the broader operating environment. While we cannot be certain that our current approach  is the only correct one, we are confident that exclusion alone cannot be the cornerstone of responsible investment. The focus of responsibility must be on what we do and how we create impact, not on what we choose to avoid.

Impact is created through active ownership, dialogue and the promotion of responsible solutions. That is why, going forward, we want to place greater emphasis on how we can be part of the solution and contribute to building a sustainable future.