TY - JOUR T1 - Exclusionary Screening JF - The Journal of Impact and ESG Investing SP - 66 LP - 75 DO - 10.3905/jesg.2020.1.1.066 VL - 1 IS - 1 AU - Elroy Dimson AU - Paul Marsh AU - Mike Staunton Y1 - 2020/08/31 UR - https://pm-research.com/content/1/1/66.abstract N2 - Investors want their assets to be a force for good, or at least to do no harm. Approaches range from avoiding companies or sectors deemed to fail on ethical grounds through to active engagement with companies. Exclusionary screening is the most prevalent approach to ESG investing, and may focus on individual stocks or entire sectors. In this article, the authors take two perspectives. First, they report on the returns since 1900 from tobacco and alcoholic beverage companies. They show that the returns from these sin stocks have substantially beaten the market in both the US and UK, and they evaluate explanations for this. Second, the authors extend their analysis to other large-scale exclusions such as those demanded by climate activists, Sharia-complaint investors, or dharmic investors. In a historical analysis of the return and risk impact from such screens, the authors find that, while divestment may exert downward pressure on stock prices, the impact of protracted and sustained exclusions is, on average, small.TOPIC: ESG investingKey Findings• ESG investors can choose between using voice (engagement) and exit (screening out unacceptable companies). If many investors exclude a company or sector, this may exert downward stock-price pressure, in which case one can expect an enhanced return from holding the stock.• Consistent with this, tobacco and alcoholic beverage companies have generated superior returns over the last 120 years. Alternatively, the performance of low-ESG companies may reflect their underlying risk exposures. The authors discuss how to harvest their risk premia through factor investing.• Some investors wish to make large-scale exclusions based on carbon exposure or other broad criteria. The authors show that, for the portfolio as a whole, such exclusions have historically had a relatively small impact on long-term returns and risk. ER -