Negative screening

Definition

Negative screening is an investment strategy that involves excluding certain sectors, companies, or practices from a portfolio based on specific ethical, moral, or sustainability criteria. This approach helps investors align their investments with their values by avoiding industries or entities that they consider harmful or contrary to their beliefs. By implementing negative screening, investors aim to promote responsible investing and social responsibility.

5 Must Know Facts For Your Next Test

1. Negative screening can target various sectors such as tobacco, weapons, gambling, or fossil fuels based on personal or institutional values.
2. This strategy is often utilized by pension funds, foundations, and individual investors who prioritize aligning their investments with ethical considerations.
3. Negative screening does not just exclude companies but can also include practices like avoiding investments in firms with poor labor practices or environmental records.
4. The rise of ESG (Environmental, Social, and Governance) criteria has influenced the popularity of negative screening among investors looking for socially responsible options.
5. While negative screening can effectively align investments with values, it may also limit potential financial returns by excluding profitable sectors.

Review Questions

• How does negative screening influence the composition of an investment portfolio?
  • Negative screening influences the composition of an investment portfolio by actively excluding companies or sectors that do not meet certain ethical or sustainability criteria. This means that an investor might avoid sectors like tobacco or fossil fuels, thereby reshaping the portfolio to reflect their values. The result is a tailored investment strategy that aligns financial goals with personal beliefs about social responsibility.
• What are some potential drawbacks of using negative screening as an investment strategy?
  • One potential drawback of using negative screening is that it can limit the range of investment opportunities available to an investor. By excluding entire sectors, investors might miss out on high-performing stocks that could enhance overall portfolio returns. Additionally, negative screening might create a perception of ethical superiority without guaranteeing positive social impact, leading some to question the effectiveness of such strategies in driving change.
• Evaluate the relationship between negative screening and the broader trends in impact investing and socially responsible investing.
  • The relationship between negative screening and broader trends in impact investing and socially responsible investing is significant as they share a common goal of promoting ethical investment practices. Negative screening serves as a foundational method for socially responsible investing by setting parameters for what constitutes acceptable investments. This approach complements impact investing by ensuring that investments not only seek returns but also align with values concerning social good. Together, these strategies reflect a growing demand for accountability and responsibility in finance, influencing how capital is allocated in today's economy.

Related terms

socially responsible investing: An investment strategy that seeks to generate both financial returns and positive social impact by selecting companies that align with specific ethical guidelines.

impact investing: Investments made with the intention to generate measurable social and environmental benefits alongside a financial return.

ethical investing: An investment approach that considers moral principles and values when selecting assets for a portfolio.