How exclusion and engagement work in sustainable investing

In a world shaped by conflict, inequality and climate change, many of us are thinking more carefully about what our money supports. From the brands we buy from to the ones we avoid, spending has become a way of expressing our values - sometimes called ‘voting with your wallet’.

But it’s not just our shopping habits that can have an impact. Pensions are invested on our behalf, often for decades, which means they can play a role in shaping the world our savings help fund.

Research shows that 64% of UK investors are interested in options that support society or the environment. Yet only a small number of people actively choose sustainable pension options.

One reason is that sustainable investing can feel hard to navigate. It’s often explained in technical language, and it isn’t always clear what different approaches involve.

Understanding the basics can make it easier to feel confident about where your pension is invested. Below, we explain the two main approaches to sustainable pension investing.

The two main approaches to sustainable investing

For sustainable pension investing, providers usually pick one of two methods. These are exclusion or engagement.

Exclusion means not engaging with specific companies or industries at all. Engagement means being involved, but with caveats. This means using shareholder power, which can help encourage better behaviour over time.

The two approaches work in different ways, and neither is better than the other. Many pension plans use a mix of both, aiming to balance values, influence and long-term outcomes.

What is exclusion?

Exclusion happens when investors avoid certain companies or sectors. They usually do this for ethical, environmental, or social reasons.

In practice, an exclusionary pension plan might:

• exclude fossil fuel producers;
• avoid tobacco, alcohol or weapons manufacturers;
• screen out firms with poor human rights records; or
• remove companies that fail to meet certain environmental standards.

The aim is to avoid investing your pension in things that go against your values.

How does exclusion work?

Fund managers look at a full list of potential investments, like different companies or sectors. Screening criteria help narrow that list down - for example, avoiding firms involved in tobacco, weapons, or high carbon emissions.

Companies or industries that don’t meet the criteria are removed. Your pension is then invested only in those that remain.

The screening can vary in scope. Some plans only exclude a small number of activities, such as cluster munitions or tobacco. Others go further, cutting out whole sectors like oil and gas, or companies that earn a certain share of their income from specific activities.

Sustainable funds can apply different criteria depending on their approach. Checking what a plan includes, and what it leaves out, can help you understand how it works.

You can usually find these rules in  documents like the fund factsheet, though some providers explain them more clearly than others.

Why might someone choose exclusion?

Exclusion appeals to many people because it:

• helps keep investments in line with their values;
• avoids supporting industries or activities they don’t agree with;
• may reduce exposure to sectors that could face future problems; and
• makes a statement about what kinds of business activity is acceptable to the saver.

For those with strong feelings about certain industries, exclusion can provide peace of mind. 

What are the trade-offs?

Exclusion also comes with some important considerations.

Companies that are trying to improve may still be left out. Investors also lose the chance to influence how those companies behave.

Defining exclusions isn't always straightforward. For example, should a plan exclude only tobacco manufacturers, or also retailers that sell tobacco products?

These trade-offs don't make exclusion a poor choice. They simply highlight why it suits some savers more than others.

What is engagement?

Engagement, also known as active ownership, works differently. Instead of avoiding companies, investors stay invested and try to encourage better behaviour over time.

This can include:

• voting on company decisions at annual meetings;
• raising concerns directly with senior leaders;
• asking companies to improve how they treat people, the environment or how they’re run; and
• working with other investors to strengthen their influence.

The idea is that long-term investors can help shape how companies operate, rather than stepping away from potentially problematic practices.

How does engagement work in practice?

Pension fund managers, acting on behalf of savers, can vote on a wide range of issues at company meetings.

These might include:

• climate strategies and emissions reduction targets;
• board structure, diversity and executive pay;
• ensuring a fair pay to all workforce;
• supply chain labour standards;
• human rights policies; and
• transparency and reporting practices.

Beyond voting, engagement often means ongoing conversations with company leaders. Fund managers may meet with executives to raise concerns, ask for clearer information, or encourage changes in how the business is run.

When investors work together, this pressure can be stronger. Large investors often set out their priorities and share updates on the action they’re taking.

Why might someone choose engagement?

Engagement can appeal because it:

• keeps influence by staying invested;
• can help drive change at large, important companies;
• spreads investments across different sectors and regions;
• encourages high-polluting industries to change; and
• focuses on gradual improvement.

For investors who believe change happens from within, engagement offers a way to be part of that process.

What are the limits of engagement?

Engagement also has its challenges. Progress can be slow, and outcomes aren't guaranteed. Effective engagement requires expertise, scale and persistence. Some companies may not respond to shareholder pressure at all.

For some savers, it can feel uneasy to stay invested in companies they don't agree with, even if change may come later.

It can also be hard to see the results of engagement. Voting records are often shared, but talks between fund managers and companies usually stay behind the scenes. This means individual savers don’t always see them.

Exclusion vs. engagement: what’s the real difference?

The difference comes down to approach.

Exclusion says: we won't invest in you. Exclusion is clear and immediate. It closely reflects values, but it limits the range of investments.

Engagement takes a different view. Investors stay invested and expect companies to improve over time. This approach is slower, keeps investments spread out, and relies on influence rather than avoiding companies.

Both approaches recognise that how companies behave has real-world effects.

Using both approaches in practice

Some pension plans use a mix of exclusion and engagement.

This usually means they:

• exclude the most controversial activities, such as certain types of weapons;
• stay invested in other companies and encourage them to improve; and
• stop investing in companies that don’t respond over time.

This approach sets clear limits on some issues, while allowing flexibility on others. How this balance works can vary between providers and funds.

The balance between exclusion and engagement varies by provider and fund strategy.

What does this mean for your pension?

When looking at sustainable pension options, it can help to think about:

• which industries you want to avoid completely;
• whether staying invested and pushing for change feels right for you;
• how patient you are, as change through engagement can take time; and
• how clearly a provider explains what it does and why.

Not all sustainable pension plans work in the same way. Some focus more on exclusions, others on engagement, and many use both.

Each fund will also apply its own sustainability criteria when deciding what to invest in. This often includes areas such as:

• reducing carbon emissions;
• supporting diversity and inclusion;
• promoting fair and ethical labour practices; and
• strong, transparent corporate governance.

Remember, sustainable investing doesn’t change the basics of investing, and returns are never guaranteed.

The takeaway

Sustainable investing is not one-size-fits-all. Exclusion and engagement are two different ways of aligning your pension with your values.

Exclusion avoids certain companies or sectors entirely. Engagement stays invested and pushes for change over time.

Many pension plans use a mix of both approaches. They set clear limits on some issues, while trying to improve others.

What matters most is choosing an approach that feels right for your values and your long-term goals. Sustainable investing gives you options, not obligations.

Risk warning

As with all investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. Tax rules can change and benefits depend on individual circumstances.

Sustainable investing approaches, including exclusion and engagement, don't guarantee better financial outcomes and may limit investment choices.

This article is for information only and isn't personal financial advice. If you're unsure what's right for you, you may wish to consider seeking independent financial advice.

Last edited: 17-03-2026