Aug 15, 2024
Due Diligence
Exclusionary screening answers a different question from the rest of ESG due diligence. Where PAI data collection and category-based ESG review are about measuring and understanding a company's practices, exclusionary screening is binary: does this deal fall into a category the fund has already decided it won't touch, regardless of how strong everything else looks. Getting this distinction clear matters, because conflating the two tends to produce a screening process that's neither a good filter nor a good measurement tool.
By
Rhea Colaso
Why Exclusionary Screening Exists Separately from ESG Scoring
A fund can, in principle, score a company well across every ESG category and still be looking at a deal it shouldn't do — sanctioned-entity exposure doesn't get better with a strong governance score attached to it.
Exclusionary screening exists to catch these categorically, before the deal reaches the point of being weighed on its ESG merits at all. It should happen early, ideally at screening, alongside the sourcing decisions covered in The European VC Due Diligence Workflow, rather than as a late-stage check that risks unwinding weeks of otherwise-completed diligence.
Common Exclusion Categories
At a category level, most funds' exclusion lists cluster around:
Controversial weapons involvement: direct or supply-chain involvement in weapons categories subject to international conventions
Severe governance failures: documented fraud, serious regulatory sanctions, or comparable red flags in the founding team's history
Sanctioned-entity exposure: ownership, funding sources, or counterparties that intersect with sanctions lists
Activities the fund's RI policy explicitly rules out: this varies fund to fund, and is where a fund's own stated commitments matter more than any universal standard
That last category is worth dwelling on: there's no single, universal exclusion list every European VC applies.
What a fund excludes should trace directly back to what its Responsible Investment policy says it excludes. A fund whose RI policy is silent on a category isn't necessarily doing anything wrong by not screening for it, but a fund whose RI policy explicitly commits to excluding a category and then doesn't screen for it consistently has a real gap.
Where Exclusionary Screening Overlaps with KYC/KYT
Sanctioned-entity exposure in particular sits at the intersection of exclusionary screening and KYC/KYT and AML checks — both are, in part, answering "is there someone behind this deal we shouldn't be doing business with." For funds with a narrower ESG scope, KYC/KYT and exclusionary screening together can reasonably cover most of what a fund needs without a broader ESG questionnaire layered on top, as covered in ESG Due Diligence for European VC. We cover KYC/KYT specifically in KYC and KYT for VC Due Diligence.
Building a Defensible Framework
Three things make an exclusionary screening framework defensible, rather than just a list sitting in a document nobody checks against:
Traceability to the RI policy. Every exclusion category should map back to something the fund has actually committed to publicly or to its LPs, not an ad hoc list that shifts deal to deal.
Consistent application. If a category is excluded, it needs to be checked on every relevant deal, not selectively — inconsistent application is what turns a defensible framework into a liability if it's ever questioned.
A documented record of the check itself. Passing a screen isn't useful evidence later if there's no record that the screen was actually run — this is the same documentation logic covered for AIFMD-regulated GPs in Due Diligence Software for European VC Funds.
Where This Fits in the Report
Like other specialist screening categories, exclusionary screening results belong in the consolidated risk view of the final DD report — not as a separate document an investment committee has to remember to check. We cover how specialist findings get pulled together in Why Your DDQ Shouldn't Be the Final Deliverable.
