Do no harm: what is negative screening and how do you apply it?

Despite its name, negative screening has nothing to do with the old-fashioned slide night – in fact, it’s an approach used by responsible investors to avoid investments that they don’t want their money associated with.

And, as the chart below illustrates, it’s the most popular approach used in responsible investing with some $148 billion in assets under management in Australia.

Source: Responsible Investment Association of Australia Benchmark Report 2018

In practice, fund managers negative screen by picking a list of issues that they don’t want their money associated with – such as weapons, tobacco, alcohol, gambling or animal cruelty, and avoid investing in companies that have activities in those areas.

Weapons and tobacco top the charts

A report from the Responsible Investment Association of Australia found that of funds using a negative screening approach, they all screened weapons and tobacco manufacturers out of their investable universes in 2017. That’s a change from the previous year, when 96 per cent screened out weapons and 88 per cent screened out tobacco.

Gambling and alcohol were the next most avoided sectors, followed by fossil fuels.

How to negative screen your portfolio

You can apply the same approach to your investments, by choosing the issues that are important to you and making the decision to avoid investing in these areas.

In some cases it can take additional research to understand exactly what companies are invested in, however increasing emphasis on reporting on environmental, social and governance (ESG) issues is making this information easier to access.

Growing concern

More broadly speaking, ESG investing – of which negative screening is a part – is growing in popularity as investors and fund managers seek to help make a difference in the world while also achieving investment returns.

What was once a niche part of the investment industry – driven by an individual investor’s choice to invest in an ethical or sustainable investment fund – has now become a mainstream part of investing.

Now, ethical considerations can directly affect company valuations, especially over the long term so understanding the intangible drivers of a company’s performance can lead to better informed investment decisions and avoid value destruction.

As an example, AMP Capital’s responsible investing funds believe that business models relying on underpaying workers or not taking into account the true environmental or social costs of a supply chain are unlikely to be successful investments.

For more information about ESG investing, view our recent webinar.