You may seek to exclude companies that derive revenue from certain products (such as tobacco) or that engage in controversial practices. This type of exclusion is called a "negative screen."
How well a company manages ESG issues may be a useful indicator of a company's long-term potential, especially when viewed alongside traditional fundamental indicators, such as earnings or cash flow.
For example, you might purposefully exclude alcohol and tobacco stocks, while also over-weighting strong ESG performers within given sectors.
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