How Does Positive Screening Effect Your ESG Investment?
This is part two in a three part series.
Today we'll focus on Positive screening associated with ESG investing.
Parts 1 & 3 focus(ed) on:
We'll talk about:
What is positive screening?
Does it effect performance?
Where is it the most effective?
Where is it the least effective?
What is positive screening?
Previously, we talked about Negative (exclusionary) screening which is the easiest way to incorporate your values into your investments. This primarily means "screening out" (excluding) certain companies or categories.
Positive screening on the other hand seeks to select investments (companies or sectors) that are potentially "best in class" on specific environmental, social or governance (ESG) metrics.
Instead of excluding, you are seeking to invest INTO these companies.
Negative Screening is primarily values based,
positive screening is usually seeking higher returns.
Commonly this is in the form of:
Best in Class
Investment INTO sectors, companies or projects selected for positive ESG performance compared to peers
Using Environmental, Social & Governance data to influence our investment decisions
Selecting investments or companies specifically related to sustainability in a particular sector or "theme"
Disclaimer: "Best in Class" is a commonly used industry term to refer to companies who have the highest Environmental, Social or Governance scores compared to their peers. IE, the "Best in class". This is no guarantee that these companies will perform better than others, merely that they have higher ESG scores compared to similar companies.
Does Positive Screening effect performance?
Jon Hale, head of Sustainability research at Morningstar stated,
"The ESG performance of companies appears to be something that can be used to generate value in a portfolio." 1
With "best in class" and ESG Integration strategies, you are normally building a portfolio comprised of companies who are leaders in their respective categories.
Companies who have high Environmental, Social & Governance scores.
One would think that picking the "leaders" would lead to increased performance. However past performance is never a guarantee of future results.
A 2015 study by Deutsche Asset & Wealth Management and Hamburg University found that across 2000 empirical studies on ESG performance, 90 percent show a positive correlation between ESG and corporate financial performance. 2
Further, a Morningstar study showed that sustainability measurements did show a potential performance advantage in many different markets. 3
So yes... Positive screening for ESG metrics can potentially effect performance.
Where is positive screening the most effective?
Positive screening appears to be the most effective when screening for leaders or best in class companies. Particularly in the G, Governance measurements. 4
Governance measurements include:
When you think about it, these are all fundamental concepts to an ethically run business. It would make sense that these concepts could lead to a better performing business.
Where is positive screening the least effective?
While I wouldn't necessarily consider this "less" effective, I'm going to say that positive screening is the least effective when it comes to thematic investing.
To clarify, I am not against thematic investing. But I do believe that for the average investor, it can expose your portfolio to undue risk unless thematic investing is limited to a portion of your portfolio.
Thematic investing is specific sector or specific cause investing.
Alternative / Clean Energy
Gender and Diversity
While I think that all of these causes are important, being too "cause focused" can expose a portfolio to too much sector risk if the thematic investment is too large a portion of the portfolio.
Positive Screening is a great way to support companies you believe in while also potentially increasing your performance.
Positive Screening goes a step beyond negative screening focusing on companies who are "leaders" in their categories.
What this all means for you:
Investing with your values is a journey, here are a few more resources that may help you...
If you don't know where to get started, I would encourage you to check out our Ultimate Guide to ESG Investments.
If you're on the fence about ESG investing, check out Five Reasons Why you should consider Sustainable Investing.
If you want tools so you can do your own investment research, check out these tools.
If you prefer to delegate, feel free to schedule a phone call. We're happy to help...
We're a different kind of financial firm than you may be used to.