As the availability of data around specific investments and their impacts grows, so does investors’ ability to strategically select assets that align with their goals. Positive screening is one impact investing strategy that has benefited from this growth in data.
What Is Positive Screening?
Investors who use positive screening to select investments concentrate their capital in industries, stocks, or projects that are considered “best-in-class” on specific environmental, social, and governance (ESG) metrics when compared to their peers. There are different ways to positively screen via ESG frameworks: some investors look for companies that are actively improving their scores, while others favor companies that have already established high scores.
This approach stands in contrast to negative screening, in which investors exclude particular stocks or sectors, for example all tobacco producers or companies with low scores on specific ESG criteria. Similar to divestment, negative screening was one of the original methods used by values-oriented investors, but the proliferation of data available across E, S, and G subjects has allowed investors to turn to other, more sophisticated lenses. Many investors now incorporate a mix of both approaches, screening out stocks to which they’re morally opposed and proactively choosing the best stocks that are making a difference in areas they care about.
How Do Investors Use Positive Screening?
Investors who use positive screening start by choosing an issue they want to make an impact on and determining the best way to measure company’s performance on that issue. The measurement tools used will depend on the issue and metric selected.
For example, with positive screening, an investor concerned about global warming might compare companies’ Sustainalytics Carbon Risk Ratings to tilt towards investments in each sector with the lowest material carbon risks. In contrast, an investor using negative screening might avoid coal or oil companies altogether, or publicly divest from all fossil fuel holdings to draw attention to the problem.
Not all issues lend themselves as readily to negative screening. For example, investors concerned about pay equity might have trouble determining a sector or industry to avoid. But investors taking a positive screening approach would be able to look at companies’ Equileap rankings or other factors to choose potential investments. In other cases, investors may actually choose to invest or stay invested in companies at odds with their impact goals in order to buy leverage for creating productive dialogues and influencing decision-making.
Positive and negative screening are two tools available to today’s investors who want an ESG-aware portfolio. As ESG investing continues to evolve, so will the methods investors use to approach it.