Real‑world examples of negative screening in sustainable investing

Real examples of negative screening in sustainable investing

If you want to understand sustainable investing in practice, you start with the examples of negative screening in sustainable investing that dominate the market today. Most ESG strategies, especially older ones, began as simple “do not invest in X” policies.

A few of the best‑known real examples:

• Faith-based funds excluding alcohol, gambling, and adult entertainment.
• Large pension funds excluding tobacco and controversial weapons.
• Climate-focused funds excluding thermal coal and tar sands.
• Human-rights-focused investors excluding companies tied to forced labor or severe supply-chain abuses.

These are not theoretical. They are written into fund prospectuses, index methodologies, and sometimes national law.

Classic sector and product screens: tobacco, weapons, gambling

Some of the clearest examples of negative screening in sustainable investing come from product-based exclusions that have been around for decades.

Tobacco exclusion as a baseline screen

For many ESG funds, tobacco is the starter screen. The logic is simple: tobacco products are harmful when used as intended, and the industry has a long history of misleading practices.

Real examples include:

• Many U.S. ESG mutual funds and ETFs explicitly exclude companies classified in the tobacco industry or deriving more than a small percentage of revenue from tobacco-related products.
• Several public pension funds, including large state plans in the U.S. and abroad, have adopted tobacco-free mandates for part or all of their portfolios.

This example of negative screening is so common that many investors now assume “ESG” automatically means “no tobacco,” even though that’s not always true unless it’s spelled out in the strategy.

Controversial weapons and defense

Another widely adopted category is controversial weapons: cluster munitions, anti-personnel landmines, chemical and biological weapons, and nuclear weapons components.

Common examples of negative screening in sustainable investing here:

• European and global ESG indices that exclude companies involved in banned or highly restricted weapons systems.
• Institutional investors that follow international treaties, such as the Convention on Cluster Munitions, and therefore exclude companies linked to those products.

Defense more broadly is trickier. Some funds exclude all weapons and firearms; others only exclude civilian firearms or companies deriving above a certain revenue threshold from weapons sales. The negative screening policy has to define those lines clearly, or you end up with inconsistent holdings.

Alcohol, gambling, and adult entertainment

Values-based and faith-based strategies often apply lifestyle screens:

• Excluding alcohol producers and distributors.
• Excluding casinos, online betting platforms, and other gambling businesses.
• Excluding adult entertainment producers or distributors.

These are classic examples of negative screening driven primarily by values and ethics rather than climate or systemic risk. They show how negative screening can be highly aligned with investor beliefs, even when the financial risk case is less clear-cut.

Climate-focused examples of negative screening in sustainable investing

Climate is where negative screening has evolved most quickly in the last decade. Investors have moved from vague “fossil fuel free” labels to more precise exclusion rules.

Thermal coal exclusion

Thermal coal is often the first target because of its high carbon intensity and the availability of alternatives.

Typical examples of negative screening in sustainable investing related to coal:

• Excluding companies that generate more than a set percentage (often 20–30%) of revenue from thermal coal mining.
• Excluding utilities that rely on coal for more than a certain share of power generation unless they have a credible transition plan.

Many climate-aligned index families now publish their coal exclusion rules in their methodologies. While thresholds vary, the direction of travel is clear: coal-heavy business models are increasingly screened out of sustainable strategies.

Oil sands and Arctic drilling

Some climate-focused investors take it further and exclude specific high-impact fossil fuel activities:

• Oil sands (tar sands) extraction, which is more carbon-intensive and environmentally disruptive than many conventional oil projects.
• Arctic drilling, where spill risks and ecosystem sensitivity are especially high.

These screens are often layered on top of broader fossil fuel exclusions. They are real examples of negative screening in sustainable investing that go beyond generic “low carbon” marketing and directly target the riskiest activities.

“Fossil fuel free” funds

The phrase “fossil fuel free” sounds simple, but in practice it can mean:

• No companies with any fossil fuel reserves (extraction and production).
• No companies whose primary business is fossil fuel services, pipelines, or refining.
• In stricter cases, no utilities that rely heavily on fossil fuels, even if they are transitioning.

Investors need to read the fine print. Two funds can both claim to be fossil fuel free, yet one may only exclude reserves owners while the other applies a much broader negative screen across the value chain.

Human rights and labor: real examples of negative screening

Negative screening also shows up in human rights and labor standards, though it is often more nuanced than simple sector bans.

Forced labor and modern slavery

Investors increasingly use exclusion lists for companies tied to forced labor, human trafficking, or modern slavery in their supply chains. This is supported by growing regulation, such as modern slavery reporting laws in several countries.

Examples include:

• Excluding companies identified by credible NGOs or international bodies as being involved in forced labor in high-risk regions.
• Screening out companies that repeatedly fail to address severe labor abuses uncovered in audits or media investigations.

These examples of negative screening in sustainable investing rely heavily on third-party data and controversies research. They highlight a key challenge: information quality and timeliness can make or break the effectiveness of the screen.

Severe human rights controversies

Some investors adopt a controversies-based exclusion policy. Instead of banning a whole sector, they exclude individual companies involved in:

• Systematic human rights abuses.
• Environmental disasters with serious community impacts.
• Bribery and corruption cases that indicate deep governance failures.

The trigger might be a rating downgrade from an ESG data provider, a formal sanction by a government, or a major lawsuit. This is where negative screening overlaps with active ownership: some investors will try engagement first and only exclude if the company fails to improve.

Faith-based and values-based examples of negative screening

Faith-based investors were doing negative screening long before “ESG” became a buzzword. Their policies provide some of the clearest examples of negative screening in sustainable investing because they are grounded in explicit ethical frameworks.

Common patterns:

• Excluding companies involved in abortion services, contraceptives, or certain areas of biomedical research, based on religious doctrine.
• Avoiding businesses that profit from pornography, predatory lending, or exploitative labor practices.
• Screening out companies whose products are seen as socially harmful, even if they are legal and profitable.

These strategies show that negative screening is not just about risk management or climate; it is also a tool for aligning capital with deeply held beliefs.

How investors implement negative screening in 2024–2025

The mechanics of negative screening have become more sophisticated as data and regulation have improved. The best examples of negative screening in sustainable investing today typically share a few features.

Clear definitions and thresholds

Modern exclusion policies rarely say just “no coal” or “no weapons.” They specify:

• Which activities are excluded (e.g., thermal coal mining vs. metallurgical coal).
• Revenue or production thresholds (e.g., more than 10% of revenue from tobacco products).
• Whether the screen applies globally or only in certain markets.

This precision is partly driven by regulatory expectations. For instance, in the European Union, sustainable finance rules require funds to be transparent about their ESG methodologies. That pressure spills over into global practice, even for funds sold in the U.S.

Use of third‑party ESG data and exclusion lists

Most large asset managers rely on external ESG data providers for:

• Sector and revenue classification.
• Controversy tracking (e.g., labor rights, corruption, environmental disasters).
• Country-level risk flags (e.g., sanctions, political instability).

They then translate that data into exclusion rules. A company with a “severe” controversy rating might be automatically excluded from ESG-branded funds until the issue is resolved.

Portfolio-wide application vs. specific sleeves

Not every investor applies negative screening across the entire portfolio. Common patterns include:

• Applying strict screens to public equities and corporate bonds, but looser rules to private markets where data is thinner.
• Running “ESG” sleeves or funds alongside unconstrained strategies, so clients can opt in or out of exclusion policies.

This matters because an institution can claim to apply negative screening, but in practice it might only cover a fraction of its total assets.

Trade-offs: what negative screening does well (and where it falls short)

Looking at examples of negative screening in sustainable investing makes the trade-offs very clear.

Strengths

• Values alignment: If you never want to profit from tobacco, controversial weapons, or fossil fuels, negative screening is a direct, transparent way to express that.
• Reputational risk management: Excluding the most controversial sectors and companies can reduce headline risk, especially for universities, foundations, and public funds.
• Simplicity: Compared with sophisticated impact measurement, negative screening is easier to explain to boards, beneficiaries, and regulators.

Limitations

• Blunt instrument: A pure exclusion approach doesn’t distinguish between a laggard and a fast-transitioning company in the same sector.
• Limited impact on real-world outcomes: Selling a stock does not directly shut down a coal plant or a weapons factory. Impact comes more from signaling, cost of capital over time, and public pressure than from individual trades.
• Performance trade-offs: In some markets or time periods, excluding entire sectors can affect diversification and returns. That’s not automatically good or bad, but it is a real consideration.

This is why many investors now combine negative screening with other ESG approaches: best-in-class selection, active ownership, thematic investing, and impact strategies.

How to evaluate a fund’s negative screening policy

If you’re trying to assess a fund or manager, the examples of negative screening in sustainable investing we’ve covered give you a checklist of questions to ask:

• Which sectors or activities are explicitly excluded? Tobacco, weapons, fossil fuels, gambling, adult entertainment, others?
• Are there clear revenue or production thresholds? Or is it vague?
• How are human rights and labor controversies handled? Is there a defined process for exclusion?
• Are country-level exclusions used (for example, for sanctioned regimes or severe governance issues)?
• How often are exclusion lists reviewed and updated?

Read the prospectus, the ESG or sustainability report, and any published exclusion lists. If the language is fuzzy or the real holdings don’t match the stated policy, that’s a red flag.

For broader context on how ESG and sustainability are defined and debated, it can help to consult neutral educational resources from universities and public institutions, such as:

• Harvard’s materials on sustainable investing and corporate governance: https://www.harvard.edu
• U.S. government resources on climate and environmental policy, which shape many climate-related screens: https://www.epa.gov

FAQ: examples of negative screening in sustainable investing

What are some common examples of negative screening in sustainable investing?

Common examples include excluding tobacco companies, controversial weapons manufacturers, thermal coal miners, gambling operators, adult entertainment businesses, and companies involved in severe human rights or labor abuses. Many funds combine several of these screens in a single strategy.

Can you give an example of a fossil fuel exclusion screen?

A typical example of a fossil fuel screen would be: no investment in companies that own fossil fuel reserves (oil, gas, or coal) or derive more than a set percentage of revenue from extracting, processing, or transporting those fuels. Some funds tighten this further by also excluding utilities that rely heavily on coal or gas for power generation.

Do negative screens guarantee that a portfolio is “sustainable”?

No. Negative screening removes certain sectors or companies, but it doesn’t automatically make what’s left sustainable. A portfolio can be tobacco-free and coal-free yet still hold companies with weak governance or moderate environmental impacts. Negative screening is one tool, not a guarantee.

Are there real examples where negative screening has changed corporate behavior?

There are real examples where widespread exclusions have contributed to pressure on industries. The divestment movement targeting South African apartheid in the 1980s is a historic case often cited by investors. More recently, broad fossil fuel divestment campaigns and tobacco-free mandates have increased public and political pressure on those sectors, even if it’s hard to isolate the exact financial effect.

How is negative screening different from impact investing?

Negative screening focuses on what you avoid: no tobacco, no weapons, no coal, and so on. Impact investing focuses on what you actively fund: solutions like renewable energy, affordable housing, or health technologies. Many investors use both—exclusions to avoid clear harms, and impact strategies to support measurable positive outcomes.