Negative screening

Definition

Negative screening is an investment strategy that involves excluding certain companies or industries from a portfolio based on specific ethical, environmental, or social criteria. This approach is particularly significant in the realm of sustainable and responsible investing, where investors aim to align their portfolios with their values by avoiding investments in sectors that do not meet their standards, such as tobacco, fossil fuels, or weapons manufacturing.

5 Must Know Facts For Your Next Test

1. Negative screening is a fundamental principle of socially responsible investing (SRI) and ESG investing, allowing investors to avoid companies that engage in harmful practices.
2. Investors using negative screening often exclude industries like tobacco, gambling, and fossil fuels to promote a more sustainable economy.
3. This strategy can significantly impact companies' behaviors, as public pressure from investors may lead firms to adopt more responsible practices to attract capital.
4. Negative screening can be implemented through various methods, including full exclusion of certain sectors or partial exclusion based on specific thresholds of activity.
5. The effectiveness of negative screening can vary depending on the overall market conditions and the extent to which other investors adopt similar strategies.

Review Questions

• How does negative screening influence investment decisions within the framework of sustainable investing?
  • Negative screening plays a crucial role in sustainable investing by enabling investors to make conscious choices about where they allocate their capital. By excluding companies that do not align with their ethical or social values, investors can create a portfolio that reflects their commitment to sustainability. This strategy encourages businesses to adopt more responsible practices and can lead to a broader shift towards a more sustainable economy.
• Discuss the advantages and disadvantages of using negative screening as an investment strategy compared to positive screening.
  • Negative screening allows investors to avoid supporting industries they consider harmful, which aligns with ethical values and can enhance the social impact of investments. However, this approach can limit diversification and potentially reduce overall returns by excluding profitable sectors. In contrast, positive screening focuses on including companies that meet specific ESG criteria, which can potentially yield higher returns while promoting responsible practices. Balancing both strategies might provide a more comprehensive investment approach.
• Evaluate how negative screening might affect corporate behavior in industries targeted for exclusion and its potential implications for future investment trends.
  • Negative screening can significantly influence corporate behavior by creating financial incentives for companies to improve their practices in order to attract investment. As more investors adopt this strategy, companies in excluded industries may feel pressured to adopt sustainable practices or diversify their offerings. This shift could lead to broader changes in industry standards and practices, shaping future investment trends towards more sustainable models. As public awareness grows regarding ethical investing, negative screening may become increasingly prevalent, driving further transformations in corporate behavior and accountability.

Related terms

positive screening: An investment strategy that focuses on including companies that meet certain environmental, social, and governance (ESG) criteria, rather than excluding those that do not.

socially responsible investing (SRI): A broader investment strategy that incorporates negative screening alongside positive screening to create a portfolio that reflects the investor's ethical values.

ESG criteria: Environmental, social, and governance criteria used to evaluate a company's performance in these areas, guiding investors in making informed decisions aligned with their values.