Negative screening debunked: What advisers should know

ESG Zenith negative screening exclusion portfolio construction Zenith Investments Partners

image
image
expand image

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.” 

Read more about:

AUTHOR

Add new comment

The content of this field is kept private and will not be shown publicly.

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

JOHN GILLIES

tHOSE 989 WHO ARE CEASED WILL GO ON TO LIVE A LONG AND HEALTHY LIFE JG...

4 days 8 hours ago
Chris Cornish

What a sticth-up. Looks like Labor Senator Jess Walsh follows Stephen Jones who follows what the industry super funds ...

4 days 5 hours ago
Peter Swan

This report is a blatant display of far-left factional partisanship, treating superannuation funds as state property and...

4 days 6 hours ago

ASIC has cancelled the AFS licence of a Sydney wealth firm, the fifth Sydney firm to see a cancellation since the start of the year....

2 weeks 5 days ago

More than 20 winners from the funds management industry have been crowned at this year’s awards....

1 week 5 days ago

ASIC has obtained interim orders from the Federal Court to freeze the assets of a registered managed fund and prevent its former director from leaving Australia. ...

6 days 5 hours ago

TOP PERFORMING FUNDS

ACS FIXED INT - AUSTRALIA/GLOBAL BOND