Negative screening

Definition

Negative screening is an investment strategy that involves excluding certain companies or industries from a portfolio based on specific ethical, moral, or social criteria. This approach helps investors align their investment choices with their personal values and ethical beliefs by avoiding businesses that may engage in activities considered harmful or unethical, such as tobacco production, weapons manufacturing, or fossil fuels.

5 Must Know Facts For Your Next Test

1. Negative screening is often utilized by institutional investors, like pension funds, to uphold ethical standards and meet the values of their stakeholders.
2. This strategy can help to mitigate financial risks associated with industries that face regulatory pressures or public backlash due to their activities.
3. Negative screening is commonly applied in sectors such as alcohol, gambling, and arms manufacturing, reflecting societal concerns over these industries.
4. Investors who use negative screening may still achieve competitive financial returns by reallocating funds to more sustainable and ethical companies.
5. Negative screening plays a crucial role in the broader context of socially responsible investing by fostering a dialogue about corporate ethics and accountability.

Review Questions

• How does negative screening impact the overall strategy of ethical investing?
  • Negative screening directly influences ethical investing by ensuring that investors can avoid companies whose practices conflict with their values. By filtering out businesses engaged in harmful activities, investors can create a portfolio that reflects their moral compass while still aiming for financial returns. This process encourages a more conscientious investment strategy that prioritizes ethical considerations alongside profitability.
• In what ways can negative screening affect the performance of an investment portfolio?
  • The performance of an investment portfolio utilizing negative screening may be influenced by both risks and opportunities. While excluding certain sectors might limit potential gains from high-performing industries, it can also protect against losses associated with companies facing reputational damage or regulatory challenges. Overall, this strategy can lead to a more resilient portfolio focused on sustainable growth rather than short-term profit maximization.
• Evaluate the effectiveness of negative screening as a tool for promoting corporate responsibility and how it influences investor behavior.
  • Negative screening serves as an effective tool for promoting corporate responsibility by holding companies accountable for their practices. By removing unethical firms from their portfolios, investors signal to the market that they prioritize sustainability and ethics. This collective action can drive change within industries as companies strive to improve their practices to attract investment. As investor behavior shifts towards more socially responsible approaches, it creates pressure on businesses to adopt ethical standards, reinforcing the importance of corporate responsibility in today's economy.

Related terms

ethical investing: A strategy where investors seek to generate financial returns while also considering the ethical implications of their investments.

socially responsible investing (SRI): An investment approach that integrates social and environmental considerations into investment decision-making, often including both positive and negative screening.

divestment: The process of selling off investments in companies or industries that are deemed unethical or socially irresponsible.