What do military weapons producers, tobacco growers, and companies using child labor have in common? They all can be excluded from your investment portfolio without a significant effort on your part. The process of excluding companies from investment consideration is called negative screening. It is also known as avoidance or exclusion. Chances are you have done your own negative screening in one way or another: looking for a babysitter without bad habits and/or a criminal record would be just one example. Since negative screening is very easy to understand, it often serves as an entry point for socially responsible investors.
Syncing Your Values and Investments
Negative screening usually involves avoiding investments in certain companies or sectors. According to www.SocialFunds.com, a website focused solely on socially responsible investing, some U.S. mutual funds companies have been involved in identifying and excluding companies that participate in the production of alcohol, tobacco, or gambling products for over 60 years now.1 One can also say that these mutual funds have been running “sin screens,” since the above mentioned alcohol, tobacco, and gambling products, combined with adult entertainment and weapons production, comprise the core of so-called sin stocks.
Negative screening doesn’t have to stop with these “sinful” industries. Entire countries can be avoided! Often, bond investors choose to exclude government bonds of countries with known human rights abuses. In another example, the PIMCO Total Return Fund III excludes securities of issuers that are engaged in certain business activities in or with the Republic of the Sudan for its government’s human rights abuses in the province of Darfur.2 Nor must negative screening exclude all “sinful” industries and stocks. Usually, certain materiality thresholds can be set in place. One can purchase shares of a mutual fund, such as the Dimensional U.S. Social Core Equity 2 Portfolio, which screens out only companies earning 20% or more of their revenue through the production and/or sale of military weapons, rather than avoiding all companies with any involvement in weapons production.3
As with anything, negative screening has its supporters and its critics. The latter argue that it doesn’t go far enough because its message isn’t strong enough.4 These critics usually advocate a more widespread use of positive screening, i.e., supporting companies that set positive examples rather than simply excluding companies that set negative examples. Whereas it’s clear that the positive approach is more proactive, the two forms of screening are really just two sides of one coin: negative and positive screens can and probably should be applied together for stronger effectiveness. In any case, due to its being a relatively easy concept, negative screening will likely remain the most common entry point to socially responsible investing for years to come.