Abstract

Environmental, Social, and Governance (ESG) considerations have become a cornerstone of sustainable investing. However, recent research by Scientific Portfolio, an EDHEC venture, reveals a critical gap in how ESG scores and ESG screening approaches align with ethical investment practices. This study examines the informational overlap between environmental, social, and governance (ESG) scores and ESG exclusionary screening strategies within equity portfolios. While ESG scores are widely used for integrating sustainability considerations in portfolio management, they may not fully align with exclusion criteria targeting companies engaged in controversial activities or behaviour. By comparing the results of both approaches on a set of 417 indices, the analysis reveals that reliance on ESG scores alone omits a substantial proportion of companies that fail to meet “do no harm” criteria. However, the results show that exclusion strategies can enhance a portfolio’s ESG score, suggesting a complementary role in achieving sustainable investment objectives.

Key takeaways:

• How companies failing to meet “do no harm” criteria can still appear in portfolios relying solely on ESG scores.
• The impact of applying “do no harm” exclusions on improving portfolios’ ESG scores and aligning with ethical mandates.

Introduction

The Global Sustainable Investment Alliance (GSIA) defines sustainable investment as an “investment approach that considers environmental, social and governance (ESG) factors in portfolio selection and management” (GSIA, 2021). Under this broad definition, the volume of global sustainable investments reached USD30.3 trillion in 2022, representing approximately 38% of all professionally managed assets. Within sustainable investment strategies, exclusionary screening, ESG integration1, and engagement represent the most prevalent approaches. While these strategies may theoretically complement one another, in practice, they rely on diverse data sources which can lead to inconsistent outcomes. This study focuses on examining the relationship between exclusion screening, guided by “do-no-harm” criteria, and ESG integration, guided by ESG scores.

Exclusion screening, historically the earliest practice within sustainable finance, remains widely adopted despite a recent slowdown (GSIA, 2023). The Financial Exclusion Tracker Initiative reports that exclusions currently emphasise climate-related concerns. For instance, the EU regulation on climate benchmarks mandates exclusion criteria concerning fossil fuel-related activities and adheres to the “do-no-harm” principles embedded in the EU Taxonomy. In practice, investors implement these exclusion thresholds based on data detailing companies’ operational activities (e.g., revenue composition, energy mix) and behaviour (e.g., controversies).

In contrast, ESG integration has gained momentum, driven by client preferences and regulatory pressure (GSIA, 2023; PRI, 2023). Integrating ESG criteria is increasingly recognised as part of an investor’s fiduciary duty and is a prerequisite for claiming alignment with sustainable objectives, as outlined in Articles 8 and 9 of the Sustainable Finance Disclosure Regulation (SFDR). In practice, ESG scores – whether proprietary or provided by external data providers – are the most common data source supporting this approach.

To clarify the relationship between exclusion screening and ESG integration, this study addresses the following questions: do strategies based solely on ESG scores naturally shield investors from companies whose activities or behaviours may cause harm? When combined with ESG integration, do exclusion strategies improve ESG scores?

Authors

Matteo Bagnara, PhD
Quant Researcher,
Scientific Portfolio ……………………………………….

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Portfolio

Read the full Whitepaper

"*" indicates required fields

Name*

First Name Last Name

Company Email*

Phone Number

Company Name*

Organization Type*

Select your organization typeAsset ManagerBanks & Capital MarketsInstitutional InvestorWealth ManagerRegulators & Public BodiesConsultantsMediaAcademicsOthers

Job Title*

Country*

Select your countryArgentinaAustraliaAustriaAzerbaijanBelgiumBoliviaBrazilBulgariaCanadaChileChinaColombiaCosta RicaCroatiaCyprusCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceGuernseyHong KongHungaryIcelandIndiaIrelandIsraelItalyJapanJerseyKuwaitLatviaLiechtensteinLithuaniaLuxembourgMalaysiaMexicoMonacoNetherlandsNew ZealandNigeriaNorwayPeruPhilippinesPolandPortugalQatarRomaniaSaudi ArabiaSingaporeSlovakiaSloveniaSouth AfricaSouth KoreaSpainSwedenSwitzerlandTaiwanThailandUnited Arab EmiratesUnited States of AmericaOther

City

Choices*

I acknowledge that Scientific Portfolio will process my personal information in accordance with its Privacy Policy. I can opt out from Scientific Portfolio’s marketing emails at any time by clicking an unsubscribe link.

https://scientificportfolio.com/wp-content/uploads/2025/09/Climate-Equity-Performance-Needs-Close-Attention.pdf

Download the PDF