These companies can then be avoided when constructing a portfolio. It is therefore the flipside of positive screening, which seeks to identify the best performers for inclusion in a portfolio, using what may be the same set of qualitative measures.
Both negative and positive screening are always done in peer comparison. Companies are judged against others in their peer group according to their ESG characteristics. For most investors, negative screening means the avoidance of the lowest-scoring part of an SI metric, usually the bottom 20% stocks ranked on the ESG score.
Negative screening therefore aims to wheedle out the wheat from the chaff when choosing stocks for a portfolio. Typical factors that the screening process looks out for include a poor environmental or waste management record, including unacceptably high carbon footprints; poor labor relations, particularly linked to the non-payment of living wages; and poor governance issues such as a lack of diversity on boards, or overly controlling private shareholders. All are taken into consideration when making the final peer group comparison.
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