Screening techniques for responsible investing.

Kearney Group ESG Investing - Screening and filtering for responsible investments
10 December 2020 Read time: 3 min


Ahh, the quest for a truly ethical investment portfolio. Well done you! If you’re venturing into the land of responsible investing, it can be pretty tricky getting your head around the ABCs of ESGs. So before you dive in, it’s a good idea to make sure you understand a bit about the screening techniques investment managers use to narrow down the universe of options and assemble sustainable funds that walk their talk. So – do you know the difference between Positive Screening, Negative Screening and Norms-Based Screening? And what about Impact Investing or Sustainability Themed Investing? What are the best screening techniques for responsible investing and how do they differ?

Read on for the answers.


What’s Positive Screening?

Positive screening is the process of actively investing in certain sectors or companies that demonstrate environmental, social and governance leadership.

For example, a fund manager might positively screen for companies with great workforce practices and employee safety records. They might screen for certain sectors that show strong environmental leadership, like companies on the front lines of renewable energy or those in sustainable product design.

Positive screening is sometimes called ‘inclusionary screening’.


What’s Negative Screening?

Negative screening is the process of actively excluding certain sectors or companies that fail to meet predetermined moral or ethical standards and/or environmental, social and governance criteria.

For example, a fund manager might exclude entire industries that they consider harmful (e.g. tobacco, alcohol, weapons, gambling) or they might avoid investing in specific companies with a bad rap sheet or notable ethical violations (e.g. human rights abuses, environmental destruction, tax evasion).

Negative screening is sometimes called ‘exclusionary screening’.


What’s Norms-Based Screening?

Norms-based screening is the process of screening investments against minimum standards of business practice, based on international norms.

For example, a fund manager might exclude investments that do not comply with globally-accepted standards like those issued by the United Nations (e.g. the UN’s Declaration of Human Rights and Kyoto Protocol), the OECD or even well-recognised NGOs (e.g. Transparency International).

Norms-based screening is sometimes called ‘minimum-standards screening’.


What’s Best-In-Class Screening?

Best-in-class screening is the process of investing in sectors or companies for their positive ESG performance, relative to their industry peers. For many responsible investors, best-in-class screening is considered problematic when used in isolation (i.e. not in conjunction with other positive, negative or norms-based screening techniques), because it can be used to merely compare ‘the best of a bad lot’.

For example, a fund manager using only best-in-class screening techniques might invest in a tobacco company or brown coal producer, if it’s showing ESG leadership relative to its peers. Unfortunately, this style of screening doesn’t account for the harm caused by or overall track record of the industry itself.


What’s Sustainability Themed Screening?

Sustainability themed screening is the process of selecting investments and screening sectors or assets based on their contribution to social or environmental sustainability.

For example, a fund manager might assemble a low-carbon or sustainable water sources portfolio, designed to achieve a specific sustainability-themed outcome.


What’s Impact Investing?

Impact investing aims to generate positive and measurable social and environmental outcomes, whilst generating a financial return.

There are three main aspects of Impact Investing. Impact Investing is:

  1. Intentional: Investors actively set out to generate a positive social or environmental impact.
  2. Measurable: The impact of the investment is measurable and transparent.
  3. Financially Rewarding: There is a financial return on investment and monetary reward beyond the positive impact on the community or environment.

For example, impact investors might set out to design a ‘gender equity impact investment strategy’ and would look for high-performing companies with a history of women in executive leadership and board roles. Another example might be impact investors coming together to provide microfinance loans and start up or expansion funding for small-business owners in emerging nations.

Impact investing is tied closely to the UN’s 17 Sustainable Development Goals (SDGs) which you can read more about here.


Tying it all together.

With appetite for ESG and sustainable investing on the rise, it’s important to understand that when it comes to screening investments, not all methods, funds or fund managers are created equally.

It’s also really important to understand that it’s often the blending of multiple screening techniques that will give you the biggest bang for your buck.

Combining negative and positive screening techniques, for example, would allow a fund manager to rule out certain types of investments and simultaneously prioritise others. In this case, they might screen out tobacco, guns and fossil fuels, whilst also positively screening for renewable energy providers and green startups.

Such a blended approach provides a nuanced and robust take on ESG and sustainable investing that’s truly fit for the 21st century.

If you’re looking for more information on ESG and sustainable investing, we’ve got everything you need to know here.

And, if you’re ready to make the switch and looking for an investment fund that won’t cost our future, check out Ethos Managed Portfolios.

Speak to the team.