Negative screening can be used to protect your charity’s reputation, avoid conflict with your objectives or contradictions with your work. It is about avoiding investments that do not meet your social, environmental or ethical criteria.

What is negative screening?

Negative screening involves avoiding investments that do not meet the SEE standards which your charity has set. It is also known as avoidance or exclusion.

There is no single correct approach to negative screening. The degree to which a particular behaviour is avoided will be determined by your charity’s policy.

Negative screening can involve avoiding investments in certain companies or sectors. In the case of government bonds it may also be possible to avoid investing in particular countries.

Investors can set materiality thresholds to determine which investments will be excluded – for example avoiding companies which derive more than 10% of turnover from gambling, rather than avoiding companies with any involvement in gambling. It is also possible to avoid the worst performing companies within a particular sector, for example those with the poorest human rights record.

The use of extensive screens reduces the investable universe, and a portfolio is generally rebalanced to take account of this.

Reasons for using negative screens

Your charity may wish to use negative screening to

•  avoid conflicts with your objectives
•   avoid contradictions with your work
•   protect your reputation
•   avoid alienating stakeholders such as staff, funders and members
•  remove specific risks from your portfolio
•   avoid investments that you believe to be morally irresponsible

Ways of using negative screens

Your charity could:

•   use the services of a research organisation
•   ask fund managers to apply screens to your investments
•   select a pooled fund that uses negative screens which fit with your needs

Negative screening can be used in combination with other strategies such as positive screening or engagement, which are explained below.

Common issues

Issues that are a common focus for negative screening include:

Alcohol
Animal testing
Environmental impact
Gambling
Military involvement
Nuclear power
Pornography
Tobacco

Positive screening can be used to further the aims of your charity and encourage responsible business practices. It involves investing in companies with a commitment to responsible business practices, that produce positive products and services or that address environmental or social challenges.

What is positive screening?

Positive screening involves investing where there is a commitment to responsible business practices, and/or positive products and services. It is also known as support or preference.

Forms of positive screening

Forms of positive screening include:

• investing in companies that sell positive products – for example educational material or essential necessities of life (food, clothing, electricity, water or housing)
• thematic investing – investing in specific areas such as environmental technology
• a best-in-class approach – favouring investments with best practice amongst sector peers. This approach allows sector balance within the investable universe.

Reasons for using positive screens

Your charity may wish to use positive screening to:

• further the aims of your charity
• select investments which perform well according to social, environmental and financial criteria
• encourage responsible business practices

Ways of using positive screens

Your charity could:

• use the services of a research organisation to identify companies that meet your positive screening criteria
• ask fund managers to apply positive screens to your investments
• select a pooled fund that uses positive screens which fit with your needs

Positive screening can be used on its own or in combination with other strategies such as negative screening or engagement.

Common issues

Issues that are a common focus for positive screening include

• Environment
• Treatment of staff, suppliers and local communities
• Positive products and services
• Corporate ethics

Engagement can be used to encourage more responsible business practices. It usually takes the form of dialogue with companies or voting at Annual General Meetings (AGMs) and is typically carried out by fund managers on behalf of investors.

What is engagement?

Engagement is the process by which investors seek to maintain or improve corporate social, environmental, ethical (SEE) or governance policy, management or performance.

Reasons for engaging

Your charity may wish to use engagement to:

• encourage more responsible business practices
• encourage greater transparency and disclosure
• influence corporate behaviour to further the mission of your charity
• find out what companies are doing in relation to areas of concern to your charity
• Potentially improve investment returns by encouraging companies to manage SEE risks or to address new social or environmental business opportunities
• fulfil your responsibilities as an active share owner (This refers to investors’ understanding of, and approach to, the broader responsibility of company ownership, the activities of the company and its role in society and the economy.)

Forms of engagement

Engagement usually involves:

• dialogue
• negotiation
• gentle (or firm) persuasion

Engagement can take the form of

• informing companies how their actions will affect your investment decisions
• encouraging and persuading them to improve certain policies and practices
• offering to help them formulate a policy or improve an approach to an issue of concern (This may be particularly relevant for a charity with an expertise in a particular area e.g. an environmental charity helping a company create a policy on biodiversity.)

Benchmarking the success of engagement is difficult. It is not always possible to determine the extent to which any company’s shift in policy and practice is due to any one investor’s engagement with it. But there is evidence that Company behaviour has been influenced by investor engagement.

Ways of engaging

Usually a fund manager will engage with companies on behalf of investors. This is typically done for financial objectives, and your charity may have to negotiate with your fund manager if you want non-financial engagement.

Fund managers take different approaches to engagement. They place different emphases and employ different strategies.

You can use the list of questions to ask fund managers given below to help ascertain which of their engagement approaches best fits with your charity’s mission and reflects issues of concern.

It is also possible for your charity to engage directly with companies, though this can be a time-consuming process.

It is also possible to undertake collaborative engagement in co-operation with other investors.

If applied discretely (i.e. not in combination with positive or negative screens) engagement means that any company within an investable universe can be purchased by the investor. Specific social, environmental, ethical or governance criteria can then be used to identify which companies to engage with.

Questions for Fund Managers on Engagement:

• What is the focus and emphasis of the engagement policy? What are the main themes and priorities and how are they decided? What is the strategy to select companies for engagement? Does the engagement policy only apply to UK equities?
• What engagement methods are used? Is it one-to-one meetings, letters, or attendance at company presentations?
• What is the fund manager’s voting record at AGMs and EGMs?
• What kinds of resources are devoted to engagement? Does the fund manager have a dedicated in-house team and/or purchase independent data?
• How does the fund manager report on their engagement activities? How much information is made available to clients? (Good reports demonstrate that the fund manager has a full understanding of SEE issues and, equally importantly, how this impacts the company’s bottom line.)
• How does the fund manager measure the impact of their engagement?
• Is the fund manager involved in any Responsible Investment initiatives (e.g. member of UKSIF, Institutional Investors Group on Climate Change, Responsible Investors’ Network, Carbon Disclosure Project or Enhanced Analytics Initiative)?
• What independent review is there of engagement activity?

Voting

As a shareholder, you also have the opportunity to vote on a number of issues at company AGMs. Traditionally, shareholders have let fund managers decide on whether and how to vote, but voting is now increasingly seen as part of a shareholder’s duty as a responsible owner.

Awareness is growing of how voting can be used to influence companies. Voting can be used to communicate dissatisfaction to companies and the media.

Shareholder resolutions

Shareholders may file a special shareholder resolution to be voted on by shareholders at the company’s AGM. In recent years, a few special resolutions have been filed on social and environmental issues, including at BP, Shell and Balfour Beatty.

Such resolutions can highlight social or environmental issues with other investors. They can also send a signal to the company’s management of the need for change if enough investors abstain or support the resolution.

Your charity could work individually or collaboratively to raise shareholder resolutions and vote on the resolutions raised by others.

However, filing shareholder resolutions in the UK is a relatively difficult process, due to the level of support needed.

If your charity owns shares in the US you could instruct fund managers to vote on social and environmental resolutions filed there.

Combined Strategies

Your charity may wish to use a combination of positive screening, negative screening, engagement and voting to achieve a variety of objectives.

Particular SRI Strategies may be more effective and appropriate as means of achieving your Responsible Investment objectives. Combining these strategies may enable you to achieve a variety of objectives.

For example, you may wish to screen out companies or sectors that you do not want to have any involvement with, support sectors that fit with your mission and activities and engage with companies to improve their performance or practice on a particular area of concern.

These strategies can also be used at different stages of the investment process – negative and positive screens can be used at the pre-investment stage to select investments and engagement can be used at the post-investment stage, once the investments have been made.

It is increasingly common for pooled investment funds to employ a combination of strategies, employing positive and negative screens and engagement strategies.

In order to maximise influence and achieve economies of scale, large charities may conduct their engagement strategies in collaboration with other investors.

Why engage or vote collaboratively?

In order to achieve maximum influence, economies of scale and to pool resources, expertise and ‘investor power’ your charity may wish to collaborate with others.

This can be particularly useful for investors wishing to engage with companies overseas.

Collaborative engagement is of most relevance to large charities with sufficient resources.

Forms of collaborative engagement and voting:

• combining shareholder power
• pooling resources to research issues.
• sharing objectives – which may involve choosing a single issue or set of issues that affects a specific group of companies and engaging with the Companies and/or drafting shareholder resolutions to place before an AGM

Collaborative engagement is undertaken on behalf of groups of investors by organisations such as the Ecumenical Council for Corporate Responsibility (ECCR) in the UK and the Interfaith Center on Corporate Responsibility (ICCR)) in the US.

Fund managers can also engage collaboratively, through initiatives such as:

• UN-backed Principles for Responsible Investment
• ShareAction’s Charities Responsible Investment Network
• UK Sustainable Investment and Finance Association (UKSIF)
• The Carbon Disclosure Project
• The Institutional Investor’s Group on Climate Change
• The International Corporate Governance Network

Integration refers to the inclusion of potentially material social, environmental, ethical or corporate governance risks and opportunities into normal investment processes.

What is integration?

Integration is the process by which fund managers include potentially material social, environmental, ethical or corporate governance risks and opportunities into normal investment analysis, stock weighting and/or stock selection processes.

It is based on the premise that extra financial criteria can have an impact on the financial bottom line in the long-term.

It considers how companies manage potential social, environmental, ethical or corporate governance risks that could damage their business.

An example of risk is the concern over obesity and how food and beverage companies are responding to the growing health crisis and its potential impact on their business. Another example is the way in which companies are responding to the potential impacts of climate change on their business.

Why use integration?

• to manage SEE risks
• to identify potential out-performance
• to identify superior management of SEE and corporate governance factors – seen by some as an indication of management quality
• to focus on the most material value drivers
• to generate insight into the market by looking at under-analysed themes
• to take account of increasing regulatory pressure on social and environmental factors

For some, integration fits with a trustee’s duty to act prudently.

A Freshfields Bruckhaus Deringer study concludes that, “the links between ESG factors and financial performance are increasingly being recognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”

Methods for integration

The analysis on such issues can be undertaken by fund managers and/or specialist researchers, who feed information to the fund manager. Good analysis may involve engagement with companies, which can allow the researchers or fund manager to influence companies where social, environmental, ethical or corporate governance issues are not being managed appropriately.

Adopting an integration approach

Your charity could decide to use the services of a fund manager with an active integration policy in addition to, or instead of, employing other SRI strategies.

It is important to seek clear information on the methods and processes used for integration in order to understand how issues of concern may be incorporated into investment decisions.

You may wish to ask:

• how do they practice integration of SEE and corporate governance matters in their investment process?
• how do they determine what issues to focus on?
• how does it affect their Company valuations and investment returns?
• what resources do they have for integration (internal and external)?
• how do they measure its success?

Integration is a sophisticated approach that is most likely to be used by charities with large sums to invest.