Ethical investing: Positive/Negative screening criteria 2020
Ethical investment traditionally focused on excluding companies whose activities conflict with negative criteria, such as “no tobacco” or “no armaments”. Increasingly, investment managers are adding an inclusive element to investment criteria by seeking companies with positive environmental and social attributes; and by influencing positively the companies in which they invest through engagement. Ethical funds reflect a range of approaches from purely exclusive to purely engagement.
Ethical investing: Negative screening criteria
Alcohol
Funds which exclude companies involved in the manufacture and/or retailing of alcoholic beverages.
Funds commonly apply a threshold under this criterion, generally excluding companies where turnover from alcohol production/retailing is greater than 10% of total, or alcohol production/retailing is regarded as the primary activity. A smaller number of funds avoid all involvement in alcohol production, regardless of turnover. Exclusion of alcohol retailers is less common than alcohol producers. A number of sectors (such as such as supermarkets, hotels and restaurants) are involved in alcohol retail but fall below such thresholds.
Animal Testing
Funds which exclude companies involved in animal testing for non-medical purposes, such as cosmetics, toiletries and household cleaning products; and/or companies involved in animal testing on products for medical purposes or human health benefit.
Animal testing policies vary widely, and complex wording can limit the scope of exclusion by applying the policy to only certain types of product (such as cosmetics), or to products only and not their ingredients. Care should be taken to read the exclusion criterion operated by each fund to ensure it meets your clients' requirements.
Animal Welfare Issues
Funds which exclude companies involved in intensive farming; retailing of meat or dairy products; and/or the manufacture or sale of products containing animal fur.
Intensive farming is characterised by systems where production is maximised, often at the expense of animal welfare. Funds generally refer to production and/or processing of meat and dairy products, particularly poultry and pig farms. A small number of funds take a stricter approach and also exclude retailers of meat or dairy products. Fund policies on fur can cover a range of activities, from breeding and rearing of animals for their skin, to retailing of products containing fur.
Armaments
Funds which exclude companies involved in the development, manufacture or supply of weapons, components of weapons and other military equipment; and companies servicing contracts with the military.
The term weapons covers both conventional and, in some cases nuclear. Some funds also refer directly to weapons covered by international banning treaties, such as anti-personnel mines and cluster munitions. A small number of funds have a stricter definition of armaments, and also exclude sales or service contracts with military customers.
Banking & Finance
Funds which exclude companies involved in banking and finance where their practices are considered environmentally or socially irresponsible.
Funds exclude banks for a variety of reasons ranging from developing-country debt, to the charging of excessively high interest rates, and financing of environmentally or socially controversial projects.
Climate Change
Funds which exclude companies involved in fossil fuels including coal, oil and gas, and activities with high carbon emissions.
Funds exclude companies involved in extracting fossil fuels including coal, oil & gas, with some applying a turnover based threshold and others an absolute exclusion based on more specific activities, such as involvement in unconventional sources like oil sands or arctic drilling. Exclusions may also be applied based on related activities, such as airline operations, power stations or more general 'high-carbon emissions'.
Corporate Governance
Funds which exclude companies based on the way in which they conduct their business - covering a range of environmental, social and governance issues. Corporate governance issues include bribery, fraud and corruption; anti-competitive practices; and breaches of international standards. Funds applying general exclusions relating to socially irresponsible products and practices will be covered under this criterion.
Environmental Impact Funds which exclude companies based on particular negative impacts, or involvement in particular environmentally damaging activities; or exclude companies involved in environmentally damaging activities if their attempts to mitigate their impacts are deemed inadequate. Some funds take a balanced approach to environmental issues, excluding negative environmental impacts where the measures to mitigate those impacts are deemed inadequate.
Such an approach implies an assessment of positive and negative factors, where positive environmental management and performance are balanced with environmental impacts. Other funds adopt an indicator-based approach, excluding negative environmental impacts regardless of positive steps taken to offset them. Such funds may exclude companies based on any involvement in specific activities or applying a threshold on the proportion of turnover derived from the problematic activity.
Gambling Funds which exclude companies involved in gambling activities. Gambling activities vary widely in scope, from casino operations at one end of the scale to retailing national lottery tickets at the other. Funds commonly exclude companies only where turnover from gambling exceeds a certain threshold, typically 10%.
Genetic Modification Funds which exclude companies involved in the development of genetically engineered organisms, such as animals for medical experiments, or crops and non-food plants; and/or which exclude companies involved in the use of genetically modified ingredients in food production. Genetic Modification covers a range of activities, and funds that exclude companies under this category may also exclude related activities, such as the release of modified organisms in crop trials and the patenting of genes. Some funds may allow investment in companies using genetically modified ingredients in food, if such use is clearly indicated on the labelling.
Human Rights Funds which exclude companies based on evidence of their involvement in violations of human rights; or exclude companies operating in countries deemed to have problems with human rights. Funds often reference breaches of international laws, standards and conventions on specific issues such as child labour, equal opportunities, forced labour, and freedom of association. Where funds correlate human-rights risk with operating in certain 'countries of concern', relevant countries are usually identified using ratings assigned by third parties. Some funds exclude investments based on the number of countries of concern in which a company operates, while others require positive balancing factors to override concerns, such as requiring a relevant human rights policy that reduces risks from operating in such countries.
Nuclear Funds which exclude companies involved in nuclear power for electricity generation, or providing products and services to the nuclear industry. Funds listed under this category covering direct and indirect involvement in power station operation or the uranium fuel cycle. Exclusions for indirect involvement relating to products or services to the wider nuclear industry, do not usually exclude products or services relating to nuclear safety; and there are no exclusions relating to medical applications of radioactive material.
Pornography
Funds which exclude companies involved in the production or distribution of pornography, or retailing of material that is judged to be pornographic.
Definitions of what constitutes pornography differ between funds, so some care should be taken with this criterion. It is rare for a listed company to be involved in production of pornography, but distribution of adult-oriented material may be more common, particularly via television broadcast for example. There are a relatively small number of listed companies involved in the retailing of pornography, and where they are involved it is normally a small part of turnover.
Product Stewardship
Funds which exclude companies involved in activities such as the irresponsible marketing or advertising of their products or services.
Irresponsible marketing exclusions focus on products such as breast-milk substitutes, and tobacco; and advertising techniques which target or exploit vulnerable groups, such as children.
Sharia Law
Funds which exclude companies that do not comply with the principles of Islamic (Sharia) law.
Sharia prohibits investments in activities considered contrary to Islamic principles. Some of these restrictions relate to products and services involving alcohol, pork, gambling, pornography and tobacco; others relate to banking and finance. Islamic banking and finance systems prohibit the use of interest or fees for loans of money, using the principle of risk-sharing (a component of trade) rather than risk-transfer as seen in conventional banking.
Tobacco
Funds which exclude companies involved in the production and/or retailing of tobacco products.
Funds typically exclude companies based on a threshold, where turnover from manufacture/retailing of tobacco products is greater than 10% of total, or tobacco production/retailing is regarded as the primary activity. A smaller number of funds avoid all involvement in tobacco production, regardless of turnover. Some sectors, such as such as supermarkets and other retailers, are involved in selling tobacco products but fall below the threshold for exclusion.
Ethical investing: Positive screening criteria
Animal Welfare
Funds which favour companies improving the welfare of animals in a range of situations, including animal used in medical and non-medical testing, and farm animals.
A positive approach to animal welfare does not imply that all negative animal issues are avoided. Funds may state that a positive approach to the humane treatment of animals is favoured but this may not mean, for example, that all animal testing is avoided - it may be that animal testing is regarded as acceptable if done in accordance with best practice, and there are efforts to reduce the number of animal experiments.
Climate Change
Funds which favour companies contributing to tackling the problems associated with climate change.
Funds focusing on climate change look at investments in activities which achieve reductions of greenhouse gas emissions, including renewable energy, energy efficiency and storage, and low-carbon technologies.
Corporate Governance
Funds which favour companies with good corporate governance and environmentally and socially responsible business practices.
Funds included under this criterion may include those with a general statement of intent to favour companies operating in positive ways, or referring to positive practices, enhancing quality of life, or contribution to society.
Engagement
Funds which engage directly with the companies in which they invest on matters of social, environmental, and ethical concern.
Engagement approaches may operate either solely or in addition to negative and positive screening criteria. Engagement involves a dialogue with companies on matters of concern, and may lead to divestment if those concerns are not satisfactorily addressed. Selecting funds involved in engagement is not a guarantee of avoiding issues of concern unless other negative criteria are in place.
Environment
Funds which favour companies improving their management of environmental risks and impacts, or with management systems that reach a defined standard; and companies that produce products with inherent environmental benefits.
Funds focusing on environmental management may use active approaches involving detailed analysis and methodologies, or passive approaches using indicators such as publication of environmental reports or certification to particular management standards. Funds focusing on environmental technologies follow an activity-based approach and seek out investments in areas such as renewable energy, water services, public transport, pollution control and waste management.
Human Rights
Funds which favour companies with a positive approach to human rights related issues.
Funds in this category seek companies that apply policies, practices or other initiatives to mitigate risks to human rights posed by their activities or the countries in which they operate. Assessments under this criterion may reference adherence to international standards and conventions on specific issues such as child labour, forced labour, and freedom of association.
Product Stewardship
Funds which favour companies providing products or services that make positive contributions to society.
Products and services regarded as making positive contributions to society include fair trade and organic products; and technologies which improve communication, and access to services such as healthcare, or banking.
Society
Funds which favour companies with policies and practices directed at the community or other social causes; companies involved in education or providing educational products; companies with good employment policies and practices; and companies operating in the health sector, or that provide products with direct benefits to human health and/or quality of life.
Funds looking at community issues include charitable donations and involvement with underprivileged groups. Some refer to general community involvement or social return; others look for companies that show more in-depth engagement with the communities in which they operate. Funds which focus on education look for companies providing educational and training services; academic publishers; and providers of text-books and information technology for schools. Funds investing in positive employee welfare look for policies and practices on health & safety, equal opportunities, disability, flexible working and assistance with parental care. Funds looking at health and welfare issues cover a broad range of activities including research and development of medicines, provision of nursing staff, or products and practices that promote healthy lifestyles.
Source: Ethical Screening
Further reading: