Negative or exclusionary screening means the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria. It has its origin in a refusal by Quakers in the 18th century to invest in the slave trade. Since then it has often been popularized as a green crusade, or a disapproval of ‘sin stocks’ such as tobacco – both on ethical grounds.

It usually means refusing to buy the stocks or bonds of companies such as ‘sin stocks’ that are involved in alcohol, tobacco, gambling or weapons. In the battle against climate change, it increasingly also means shunning fossil fuel producers or polluters. And in some cases, national law demands certain exclusions; Dutch legislation, for example, bars investing in any company making cluster bombs. Exclusionary and negative screening is the most applied implementation of Sustainability Investing with 15 trillion USD in assets in 2016 globally.

As some of these excluded industries are well entrenched in mindsets – shunning cigarette companies goes back many years, while more recent exclusions have included thermal coal producers – it is easy to see why some people thinking that this is only what sustainability investing is about.

However, negative screening is only one side of the coin. Investing sustainably is also reliant on positive screening, as what is put into a fund is ultimately more important than what is left out. The Global Sustainable Investment Alliance provides an overview that is becoming the market standard. Besides negative screening, the following SI methods can be applied:

• Positive/best-in-class screening: investing in sectors, companies or projects that are chosen for their positive ESG performance relative to industry peers

• Norms-based screening: checking candidates for investment against minimum standards of business practice based on international norms

• ESG integration: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis

• Sustainability theming: targeting themes that are specifically related to sustainability, such as clean energy or sustainable agriculture

• Impact/community investing: typically aimed at solving social or environmental problems, including community investing, where capital is directed to needy individuals or communities, as well as funding businesses that have a clear social or environmental purpose

• Corporate engagement and shareholder action: the use of shareholder power to influence corporate behavior, including direct engagement such as communicating with board members, filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.

Depending on the goal an investor has, specific applications are useful. Using ESG data in investments often is done with the aim of improving returns or reducing risks. Impact investing and active ownership often has a goal of making a difference, while also creating a financial return. As it is Robeco’s core investment belief that using ESG information leads to better-informed investment decisions and also benefits society, implementation has focused on ESG integration and active ownership.

When it comes to ESG integration, the data gathered from many different sources is used to analyze and value a company. Generally, a security with a better ESG performance on material issues usually has a greater chance of making it into the portfolio than one with a lower profile. However, if ESG risks are already very much priced into the market, the portfolio manager can still invest if he or she thinks there is enough room for improvement to allow an upside for the stock.

ESG integration therefore enables a fully informed investment decision to be made, using both positive and negative sustainability screening techniques, along with other factors that may have a bearing on whether to buy or sell. This can include, for example, the principles of value investing, where the portfolio manager seeks stocks whose current price does not reflect the perceived potential of the company.

Exclusion – the ultimate in negative screening – should also be seen as a last resort. Most investors prefer to firstly engage with companies to try to find ways in which their corporate behavior can be improved. Robeco does this through a bespoke Active Ownership team with engagement specialists who talk to investee companies on a regular basis.

This process is preferred because once a company is excluded, it is not possible to engage with it, and investors cannot use their influence to seek ESG enhancements. Divestment presents a similar problem in that it simply transfers ownership from an unhappy investor to a more willing one, and does not address the underlying issue, such as in decarbonization.

And engagement can still work, even when dealing with long-standing and seemingly insurmountable problems. ‘Big Oil’ companies, for example, are still producing fossil fuels – but they have been successfully persuaded to change their business models to gradually put more focus on renewable energy. This has led to wind and solar farms becoming large parts of their business as they move away from traditional oil and gas, effectively aiding decarbonization and slowing climate change.