The way we invest money has a powerful impact – if it is invested in something that is fundamentally negative, our investment is tacit support. Unsurprisingly, responsible investors (including people responsible for trusts) are increasingly looking more deeply at how they invest. Many now expect more than a good financial return – they want to know their investment is supporting a positive outcome for the environment or society.
Two approaches often used in responsible investing are negative and positive screening.
What is negative screening?
Put simply, negative screening is seeking to avoid investing in industries that may be considered unsustainable or even harmful. A goal is to make a positive difference by excluding certain stocks.
Common exclusions are things like fossil fuels, tobacco, alcohol, gambling and weapons, sometimes referred to as ‘sin stocks’. Other criteria might be avoiding a geographic area as a way of avoiding supporting particular political regimes or avoiding stocks that are associated with unacceptable human rights practices. Often referred to as ‘socially responsible investing’, the goal is to minimise harm.
Investors can ask their financial advisors to avoid this type of investment or stocks in their investment portfolios. However, it can be difficult for investment advisors to completely filter out such industries due to a lack of information available about particular entities. Not all companies provide information on things that may matter, for example, the diversity of staff, or the proportion of products that might be classified as harmful. So negative screening can be rather a blunt tool.
What is positive screening?
By contrast, positive screening, sometimes called ‘best in class screening’ seeks to make a positive difference by supporting particular industries or practices.
This might involve supporting particular stocks that have positive outcomes, such as stocks that have low carbon footprints or that are seeking to solve an environmental issue. It is arguably simpler to identify and support companies that excel in their fields.
Positive screening is not perfect either and can be too exclusive, particularly if investors are looking for a diverse portfolio.
Neither approach is perfect, and often a mixed approach is adopted. The key is to ensure:
Myth busting
Some investors worry that investing in socially responsible options will limit their financial return or may be too risky. Our ‘Legal Opinion on Enabling Impact Investing’ sets out to bust some of the pervasive myths about impact investing. It encourages investors responsible for funds to think again about how their funds can make a meaningful difference and provide a financial return.
There are many other useful insights on our Impact Investing Information Hub. Please do get in touch if we can assist you with impact investing.
This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please contact a qualified legal professional. Reproduction is permitted with prior approval and credit to the source.
