Negative screening debunked: What advisers should know
As more investors seek to avoid poor ESG performers from their portfolios, Zenith Investment Partners unpacks the complexities around negative screening.
Negative screening can be defined as the practice of excluding companies or stocks in an investment portfolio based on poor performance of ESG criteria, according to Morningstar.
The process is one of the many strategies that make up responsible investing and is heavily geared towards an investor’s personal values.
However, negative screening is far from straightforward, said Dugald Higgins, head of responsible investment and sustainability at Zenith Investment Partners.
Beyond the exclusion of poor ESG performers, it requires a nuanced and dynamic approach. Higgins unpacked the key aspects of negative screening for advisers seeking a deeper understanding.
“Negative screening has long been used to avoid companies involved in controversial activities. However, increasing regulatory attention on greenwashing allegations complicates this process,” he said.
“Typically, this is not because funds are trying to hide the details, it’s because from a promotional perspective, explaining the details that negative screens are governed by isn’t always simple. Screens often rely on a complex set of rules and applicable thresholds. The challenge for managers is balancing simplicity with transparency.”
Higgins gave the example of fossil fuels, a common screen found in responsible investing. The several stages involved in the production of fossil fuels can complicate decisions regarding the extent of the screen.
“While many funds have screens dealing with coal, it is not uncommon for these to still permit exposure to companies which generate revenue from coal exploration and/or refining.
“Similarly, while others may apply screens regarding thermal coal, metallurgical coal (for steel making) may still be permitted.”
As a result, drawing the line on where a screen begins and ends can be complex and multifaceted, the responsible investment head noted.
The materiality of a screen is also subjective and depends on the perspective of an individual investor.
While the top issues Australians want to avoid in their investments include animal cruelty and human right abuses, other topics such as alcohol or fast fashion might not be as easily discernible.
Higgins continued: “With screening, what’s viewed as ‘right’, let alone material, is often in the eye of the beholder.”
Discussing with clients why negative screens don’t cover certain aspects and how that relates to their investment strategy is crucial for advisers, he suggested.
“Negative screening serves a valuable purpose for investors sensitive to controversial issues. However, a fund’s screening criteria are unlikely to accommodate all investor preferences perfectly. The challenge is to understand the purpose of a screen’s design and how that in turn serves the purpose of the fund’s overall strategy.”
AUTHOR
Jasmine Siljic
Recommended for you
A NSW-based adviser has been banned from providing financial services for five years for inappropriate advice and the AFSL of his business has been cancelled by ASIC.
The introduction of Rhombus Advisory has caused a shift in the top advice licensees as Insignia separates its advice business into two channels.
Given the clear divergence between the cost of financial advice and clients’ willingness to pay, two experts explore how advisers can transform the way they convey value to potential clients.
Nearly 18 months since Invest Blue adopted its nine-day fortnight structure to support employee wellbeing, the national advice firm has enjoyed positive results across all metrics.
Add new comment