Exclusionary screening is the process of removing from an investable universe those sectors, industries or companies whose activities or practices are inconsistent with an investor’s values, standards or norms

Exclusionary screening, which is also known as negative screening, is the process of removing from an investable universe those sectors, industries or companies whose activities or practices are inconsistent with an investor’s values, standards or norms.

Long considered the harbinger of sustainable investing, exclusionary screening was first used by faith-based groups and other organizations as a way to abstain from investing in companies whose practices they deemed unacceptable. This includes avoiding so-called “sin” stocks such as tobacco, weapons, gaming and alcohol. Typically, this means excluding investments in companies that derive more than a certain amount of their revenues from activities deemed undesirable by the investor.

Common exclusionary screens

Common exclusionary screens, different icons to represent these such as cards for gambling and cigarette for tobacco
Exclusionary screening on the basis of values, standards and norms is most often applied to the equity and fixed income instruments of publicly listed companies. The degree to which a company, industry or sector is excluded is determined by an investor’s policy guidelines. For example, a socially responsible investor may decide not to invest in any company that earns at least 50% of its revenue or more than $1 billion in overall revenue from the sale of alcohol-related products. Another investor may eschew government bonds of certain countries because of concerns over geopolitical stability or human rights violations. In order to accomplish these goals, an investable universe—often based on a traditional index—is identified and then pre-screened to eliminate those companies that participate in businesses the investor does not wish to support.

Top exclusion criteria for European investors

Source: Eurosif: European SRI Study 2016.
Top exclusion criteria for European investors
While exclusionary screening can help investors promote certain values and principles, it may also affect a portfolio’s performance and tracking error. For example, because an investment manager is prohibited from investing in specific companies, performance may vary. For instance, the MSCI World Tobacco Index has outperformed the MSCI World Index in 11 out of the last 16 years. As a result, individuals investing in a global equity portfolio that excluded tobacco manufacturers may have lost the opportunity to earn potentially higher returns in those years when tobacco stocks performed strongly. On the other hand, individuals investing in a portfolio whose holdings closely resembled that of the S&P 500 Fossil Free Fuel Index TR (Total Return) for the five-year period ending April 30,2018, would have earned annual returns of 8.43% compared to 8.495 earned by the S&P 500 Index. 

Investments in tobacco stocks have far outpaced those of global equity markets since December 30, 1994.

Source: MSCI, data from March 2002 through April 2018. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Investments in tobacco stocks have far outpaced those of global equity markets since December 30, 1994.

Tracking error—or the difference between a portfolio’s returns and the benchmark it is meant to match or exceed—may also be affected. As a result, many investors use separately managed portfolios to structure their investments to closely track a reference benchmark with minimal sector or regional biases.

As the popularity of different approaches to values-driven investing continues to grow, information on companies’ business involvement and revenue exposures will continue to play a critical role in enabling investors to judge performance and make informed decisions on the potential impact of their investments. This includes data available from third-party sources such as Bloomberg or organizations such as the Sustainability Accounting Standards Board. 

The Sustainable Investing Series

Investors around the world are increasingly interested in ways to use their capital to help support and achieve positive environmental and social outcomes. In this series, we outline the various approaches to integrate environmental, social and governance (ESG) considerations into your investment strategy.


All index performance information has been obtained from third parties and should not be relied on as being complete or accurate. Indices are shown for comparison purposes only. While an investor may invest in vehicles designed to track certain indices, an investor cannot invest directly in an index.

The S&P 500 Index is a capitalization weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component’s price change is proportional to the issue’s total market value, which is the share price times the number of shares outstanding. “S&P 500” is a trademark of the parent company, “The McGraw-Hill Companies, Inc.” (source: www.standardandpoors.com).

S&P 500 Ex-Sector Indices. These float-adjusted, market capitalization weighted indices include all companies in the S&P 500, excluding one or more sectors. Company classifications are based on the Global Industry Classification Standard (GICS®).

The S&P 500 Ex-Energy Index is designed to provide broad market exposure except for members of the energy sector.

The Dow Jones Sustainability Europe Index ex Alcohol, Tobacco, Gambling, Armaments & Firearms and Adult Entertainment Index is designed to measure European sustainability leaders as identified by RobecoSAM through a corporate sustainability assessment. The index represents the top 20% of the largest 600 European companies in the S&P Global BMI based on long-term economic, environmental and social criteria. It excludes companies that generate revenue from alcohol, tobacco, gambling, armaments and firearms, or adult entertainment.

The MSCI World Tobacco Index is composed of large and mid cap stocks across 23 developed market (DM) countries.* All securities in the index are classified in the tobacco industry (within the consumer staples sector) according to the Global Industry Classification Standard (GICS®).

The MSCI World Index captures large and mid cap representation across 23 DM countries.* With 1,648 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.