Question

Discussion the sentences 'The more firms you exclude (negative screening) from an initial sample of firms/ portfolio the more sustainable your portfolio becomes.'

Answer 1

Impact investing is a way of expecting a financial return by investing your money with the intent to bring about some socially desirable outcome. Socially responsible investing (SRI) is a form of impact investing, Its an strategy used to align investments and social goals or socially desirable outcomes.Most arguments against sustainable investing (SRI) are covered under the shadow of 'lost opportunity'. The inadequacy of this argument can be explained by - If someone is limiting the opportunity by removing securities from the investable universe, they are necessarily hampering returns.

Along with with the concept of SRI, comes the concept of investment screening. Investors know that their money can produce positive returns by achieving both financial growth and positive social impact. Investment screening is used to filter out companies or organizations that do not meet investors’ standards, and instead allocate capital to those that do.

Positive and negative investment screening is used to distinguish between different organizations based on how restrictive investors would like their investments to be. Positive screening identifies and focuses investments into companies that are considered top performers based upon chosen criteria.And negative screening looks to exclude companies that perform poorly on environmental, social, and corporate governance (ESG) criteria and removes them from investment portfolios.

Negative screening is one of the most widely used criteria which involves excluding sectors, companies, or practices from investment portfolios based on ESG criteria. Also it can be assumed as one of the most basic methods of separating socially responsible investments from those that are likely to have a negative effect on society.This technique is now used with most of the sustainable investments.

Negative screening excludes investments in companies that actively work against the investor’s values, such as organizations with a history of international bribery or corruption. Effectively, this process works to remove investments in entities that are assumed to be having a negative impact on society or the environment.

Early socially responsible investors used negative screens to weed out companies in what we call as ‘sin industries’, such as alcohol, tobacco or gambling. However the evolution of negative screening has seen the exclusion of companies that do not meet diversity standards, emit large amounts of greenhouse gases, or engage in corrupt business practices.

Advantages of Negative screening

- Widely used process of identifying targeted investments for a reason.

- Investors hesitant to adopt SRI may consider negative screening as it does not require companies to go above and beyond to be included in an investment portfolio. This can be beneficial to investors who are worried that SRI may be too exclusive, inclusivity is something which can be related to Negative screening

- Negative screens can also prevent investments into specific countries. Countries that are presumed to be human rights abusers.

Disadvantages:

One of the largest drawback is that it doesn’t work to support investments that align with an investor’s values. Negative screens work solely on eliminating investments that go against investor values. Negative screens do little to elevate the companies that actively do good. So to overcome this investors may want to consider positive screening, wherein investors seek out stocks that align with their values, along with those that don’t.

Thus negative screening can help us to build a sustainable and socially responsible portfolio that can be used by the investors for a long run.

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