Summary: Many people think about negative screening when it comes to the use of ethics in investment. There are now many more subtle ways to deselect potential companies from a fund.
A rather blunt but often effective tool in ethical investment is the use of negative screening. The first ethical and socially responsible investment funds used this method to help guide their decision making.
Essentially, negative screening is a process which excludes companies as potential investments by takng into account their corporate involvement in unsuitable industries. As time has passed and the ethical investment world has evolved, these criteria have been expanded to include other areas such as the environment.
Of course, even this method has it's faults. There are many
companies that fail when using negative criteria. This is despite the
fact that their main business model is acceptable, but an offshoot or
subsidiary, is breaking the rules of this test. If so, how small a
subsidiary is a small subsidiary? How bad is bad if mostly the company
is good?
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Some examples of business areas which are generally excluded by negative screening include:
- alcohol
- arms makers and sellers
- breaches in the human rights of employees or local residents
- gambling
- nuclear power
- polluters
- supporters of oppressive regimes
- pornography and adult entertainment
- tobacco
- users of pesticides in farming
Needless to say, these criteria can leave a lot to be desired. Some people will be against pollution and weapons makers - quite reasonably - but have no moral or ethical issue with a firm involved with gambling. To many investors, investing in the stock market is little more than a gamble!
Within the investment industry there is occassional discussion about the use of such criteria. Many professionals believe that excluding companies in this way achieves little, other than restricting the choice of a fund manager and providing a marketing opportunity by differentiating a fund by it's ethical position. Of course, over time, many funds are created with almost identical marketing and ethical positions meaning that even this possible advantage is eroded.
It is also worth pointing out that some of the most profitable sectors for investment (historically) have been the sin stocks. These include gambling, alcohol and tobacco. By excluding some of the best opportunities in the stock market, many professionals feel that long term underperformance is very likely.
In contrast, your author and some friends in the investment world have often joked that if we were to ever launch our own fund (which is highly unlikely), we would call it the 'Mafia Fund' and specifically invest in casinos, racehorces, poker rooms and nightclubs and the fund would outperform most of the market most of the time!
This, as ever, highlights the dilemma involved in ethical investment - are you investing for mental or monetary reasons?
To see other pages which discuss other areas of ethical investment, please visit:
What Is Ethical Investment?
The Ethical Investment Dilemma
What Are The Main Ethical Investment Strategies?
How And Why Does Positive Engagement Work?
Are Ethical Investment Funds Higher Risk Than Other Similar Funds?
What Is Positive Screening?
Should You Be Investing In Water?