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ESG exclusions: a behind-the-screen analysis

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The exclusion of certain businesses from investment portfolios – such as tobacco or weapons stocks – whose activities oppose the ethical views held by an investor, was initially practiced by a fervent few as one of the earliest forms of responsible investing.

Now the movement has a broad following. We support the rise of active ownership as an effective way for investors to exercise their responsibilities, but also recognise that exclusion lists – or screens – can help investors practise their beliefs.

Exclusion lists seem simple in principle, but can be complex in implementation: tolerance levels must be set to govern exposures to companies directly involved in one or more screened-out lines of business, as well as those forming related supply chains.

Any exclusion list should be enforced carefully. This helps to ensure that an investor’s financial objectives concerning return and volatility can be achieved while also fulfilling their long-term responsibilities.

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