Negative & Exclusionary Screening

Part one in a series exploring concepts related to sustainable, responsible, and impact investing.

Negative screening (or exclusionary screening) is the process of screening specific assets out of an investment universe or strategy. Implementing these screens is called divesting and results in divestment.

Divesting does connotate excluding something that one would otherwise own. For instance, a large-cap fund might not own tobacco stocks or small-cap stocks. Intentionally screening out tobacco stocks would be considered divestment, because it is something the fund would own otherwise. However, the fund would not be considered to have divested from small-cap stocks though, as they fall outside a large-cap fund’s investment universe. In other words, divestment is the intentional act of excluding assets that one would otherwise own.

There are purely economic reasons to divest from assets, but I will focus on values-based divestment here. Values-based reasons to exclude assets may include not wanting to be associated with or derive any benefit from specific activities/products/services. Values-based screening has ancient roots as various religions have forbidden debt with very high interest (or any interest at all) for thousands of years (see here). More recent examples include the Quakers divesting from the Atlantic slave trade or US investors divesting from Apartheid-era South African assets. Today, hot topics include tobacco, weapons, and fossil fuels.

It should be noted that there are arguments that even non-economic considerations can also be economic ones. For instance, as energy consumption shifts towards renewable energy, the returns from fossil fuels may suffer. A mass shooting may bring unwanted publicity and legislation upon a firearm manufacturer. These are cases where values issues may become value issues.

There are a wide variety of objectives and approaches to divestment, each with a unique set of benefits and drawbacks. To learn more about integrating values-based screens into your portfolio, contact us today.