ESG Scores vs. ESG Exclusionary Screening: Do They Tell the Same Story?
In their latest study (1), researchers Vincent Bouchet, Jenna Jones, Aurore Porteu de La Morandière, and Shahyar Safaee from Scientific Portfolio (an EDHEC Venture) along with Mathieu Joubrel of ValueCo, examine the relationship between two prominent strategies in sustainable investing: environmental, social, and governance (ESG) integration, based on ESG scores, and exclusionary (i.e., negative) screening, which targets companies involved in harmful activities or behaviour. By analysing 130 equity indices from Europe and 387 from the United States (as of September 2024), the study sheds light on whether these approaches lead to similar decisions in sustainable portfolio management.
- This paper will be presented on February 27, 2025, online (3.30 pm, GMT) - to learn more and register, follow this link
Why compare ESG scores and ESG exclusionary screening?
Sustainable investing, now representing over $30 trillion globally (2), relies on several strategies. Among these, ESG integration assigns companies scores that reflect their sustainability practices and inform financial portfolio allocation, while exclusionary screening excludes companies involved in controversial activities - such as fossil fuel extraction or the production of controversial weapons - or those associated with contentious behaviours, such as corruption.
Despite their prevalence, these methods use different data sources and may lead to divergent “sustainable” portfolios.
ESG scores, in particular, have been the subject of significant debate and are known to exhibit considerable variation across providers. Different ESG data providers frequently assign divergent scores to the same company or fund, as highlighted by recent academic studies (3).
To account for this heterogeneity, this study uses a unique database provided by ValueCo (4) that aggregates ESG scores from more than five asset managers for each equity issuer.
From this data, the authors investigate two key questions (1): do high ESG scores naturally exclude harmful companies? Can exclusionary screening improve ESG scores when combined with ESG integration?
Limitations of ESG Scores in Identifying Harmful Companies
The study finds that ESG scores alone are not sufficient to ensure alignment with “do no harm” principles. High ESG scores, whether at the company or portfolio level, often fail to exclude companies involved in harmful activities. For example, in the U.S., 41 out of 97 indices with the highest ESG scores (top quartile) hold more than 8% of companies flagged as harmful under consensus-based exclusion criteria (5). On the other hand, around 10% of the companies in the Europe zone benchmark with the highest ESG scores failed to meet the exclusion standards.
These discrepancies might be attributed to the scope and methodology of ESG scores. While exclusionary screens target specific activities or controversies, ESG scores evaluate a broader range of factors and weight them to produce a single score. A company might score highly on governance or social metrics while failing to meet climate-related criteria.
A positive impact of exclusions on ESG scores
The researchers demonstrate that exclusionary screening not only identifies harmful companies but also enhances portfolio ESG scores. Exclusion criteria tend to remove companies with lower ESG scores, thereby raising the average score of the remaining portfolio. For instance, in this model, applying exclusions based on the 17 United Nations sustainable development goals (5) increased the weighted average ESG scores of U.S. indices by up to 5 points (scores are normalised between 0 and 100).
However, the impact of exclusions varies based on the initial ESG profile of the portfolio. For indices already exhibiting high ESG scores, exclusions have little effect, as most companies with low ESG scores had already been filtered out. This indicates a possible complementarity between ESG integration and exclusionary screening, particularly for portfolios with moderate or low initial ESG performance.
Regional Differences: Europe vs. the U.S.
The study also highlights regional differences in the interplay between ESG scores and exclusions. European indices generally exhibit higher ESG scores than their U.S. counterparts, reflecting regional variations in sustainability regulations and market expectations. However, the proportion of harmful companies excluded by consensus and climate-related criteria is comparable across regions, indicating that harmful activities are not confined to one market.
Interestingly, U.S. portfolios showed greater improvements in ESG scores following exclusions, suggesting that American indices have more room for improvement. This underscores the importance of regional context in applying sustainable investment strategies.
Practical Implications for Investors
For fund managers, these findings underscore the limitations of relying solely on ESG scores to build sustainable portfolios. ESG scores provide valuable insights into a company’s overall performance but may fail to capture specific harmful activities. Exclusionary screening, in contrast, offers a focused approach to aligning portfolios with sustainable and climate objectives. The study also emphasizes the need for transparency in exclusion methodologies to ensure that exclusion strategies align with stakeholder expectations and regulatory requirements.
Looking ahead: balancing financial and sustainability goals
A key takeaway from the study is that exclusionary screening does not undermine ESG integration but rather complements it. The natural next step would be to anticipate the financial impact of such exclusions, a topic which is covered in Porteu de la Morandière, Vaucher and Bouchet (2025) (5) where they find that applying exclusions either based on consensus criteria or climate criteria has a relatively low impact on the financial risk and return profile of indices and that this impact can be further reduced with optimisation reallocation methods.
However, the researchers caution that stringent exclusions, such as those based on sustainable development goals, may lead to higher tracking errors and deviations from sectors, highlighting the need for investors to carefully consider the trade-offs between financial and extra-financial objectives.
As sustainable investing continues to evolve, the integration of complementary strategies like ESG scores and exclusions will likely play a critical role in shaping the next generation of responsible investment practices.
References
(1) Bouchet, V., Jones, J., Joubrel, M., Porteu de La Morandière, A. & Safaee, S. (2024) Do ESG Scores and ESG Screening Tell the Same Story? Assessing their Informational Overlap. Scientific Portolio White Paper. Available at: https://scientificportfolio.com/knowledge-center/?file=2024-12-do-esg-scores-and-esg-screening-tell-the-same-story.pdf
(2) Global Sustainable Investment Review 2022, GSI-Alliance - https://www.gsi-alliance.org/members-resources/gsir2022/
(3) See for example Berg, F., J.F. Koelbel & R. Rigobon (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance 26(6): 1315-1344 - https://doi.org/10.1093/rof/rfac033
Gibson Brandon, R., S. Glossner, P. Krueger, P. Matos & T. Steffen. (2022). Do responsible investors invest responsibly? Review of Finance 26(6): 1389-1432 - https://doi.org/10.1093/rof/rfac064
(4) ValueCo specialises in collecting proprietary extra-financial assessments developed internally by asset managers to provide an ESG market view, similar to an ESG bid-offer system for financial markets. See https://www.valuecometrics.com/en
(5) For more information about these criteria, see Porteu de La Morandière, A., Vaucher, B., & Bouchet, V. (2025). Do exclusions have an effect on portfolio risk and diversification? The Journal of Impact and ESG Investing, [Forthcoming]
And see EDHEC Vox (oct. 2024) "From Exclusions to Returns: Evaluating the Financial Risks of Responsible Investing" (Bouchet et al.)
Photo by Mathieu Stern via Unsplash
