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State Street Global Advisors’ Approach to ESG Screening: Methodology

ESG screening involves excluding specific companies, industries, or countries from an investment portfolio based on ESG factors or risks. While this type of screening may sound relatively simple, the process involves a significant amount of judgment on the part of asset managers or the third-party data providers with whom they partner to conduct the screening.

Investors who seek screened portfolios often express a desire for screening in a specific area— for example, seeking to screen tobacco from a portfolio. But there are a variety of ways that a company might be involved in tobacco: for example, as a manufacturer, licensor or retailer.

Additionally, there are multiple potential thresholds for what it means to be “involved” in tobacco. Should a business that derives 1 percent of its revenue from tobacco-related products count as “involved”? What about a business that owns a significant portion of a tobacco manufacturer but does not conduct its activities directly?

There are several ways in which a company can be considered to be involved in a particular product or service. Drivers of product involvement might be described in terms of :

  • Revenue thresholds What percentage of a company’s total revenue is derived from this industry, product or topic?
  • Activities What part of the value chain is the company involved in?
  • Significant ownership relationship with a company Is the company an owner of, or owned by, another company with involvement in this issue?

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