Myth of Positive Screens

What’s the Difference Between Positive and Negative ESG Screens?

12/18/2019

Responsible investing screens are powerful tools for investors, allowing them to build portfolios of companies that are consistent with their principles. However, many investors can become distracted by the notion that there are two types of screens: positive screens and negative screens. 


In reality they’re just two sides of the same coin: The resulting portfolio is identical, regardless of whether the screen is perceived to be excluding “bad” companies or including “good” ones. Rather than focusing on positive and negative screens, investors should focus on whether the securities being selected reflect their principles and financial objectives.


The ubiquity of investment screens

Screens are a familiar and well-known investment tool, and they extend far beyond the world of responsible investing. As a matter of fact, every investment portfolio is the result of a screen, including only those companies that meet the investor’s criteria and excluding those that don’t. For example, in Ben Graham’s classic book from 1949, The Intelligent Investor, he provides rules on the selection of stocks, including capital structure, dividend payments, and earnings multiples—all of which have been translated into numerous value-investing screens over the decades. 


Let’s consider Graham’s recommendation of a “long record of continuous dividend payments.” Whether one views this in terms of which stocks to avoid (those with a short or nonexistent record) or which to pursue (those with a long track record), the resulting outcome should be a portfolio that includes only companies that have been paying a dividend for some minimum period of time. 


The salient issue when determining which securities to hold isn’t whether this is an example of employing a “negative” screen or a “positive” one. Rather, the more important issue is what qualifies as a “long record.” An investor who views this to be 50 years is likely to end up with a rather different portfolio than one who thinks it’s seven years. Some investors may also have specific requirements about the level and growth of the dividend, further distinguishing their screening criteria and portfolio results. 


What distinguishes responsible investing screens?

Screens based on ESG criteria operate in the same manner. These responsible investing screens simply divide the investment universe into acceptable and unacceptable portions based on certain environmental, social, or governance criteria. What distinguishes one screen from another is the metric and the threshold of acceptability. For example, one could use a metric based on total carbon emissions or based on carbon emissions normalized by sales. One could use a threshold that permits investment in companies only if normalized emissions are below a certain level or only if they’re better than peer average. 


These responsible investing screen characteristics, as well as whether the screen is applied selectively or without exception, create the differences in outcomes. Active managers typically exercise discretion when forming the final portfolio, using the screen criteria as just one input into their decision. Index-based investors typically follow a rules-based approach and wouldn’t selectively override the criteria. 


The bottom line

ESG screens are a powerful and frequently used tool for responsible investors. They allow investors to identify companies that best reflect their objectives. There’s no need to be distracted by trying to determine whether securities are being chosen using a “negative” screen or a “positive” one. 


Instead it’s more valuable to focus on the metric and threshold that define the screen and ensure that investors’ specific principles are represented. These are the choices that will meaningfully impact which securities remain eligible for investment; accordingly, they're much more important than whether a screen is perceived as removing “bad” companies or including “good” ones.  


With additional contributions from Gwen Le Berre, Director of Responsible Investing.

Potential Parametric solution

For more than 20 years, our Responsible Investing capability has offered a robust and continually evolving menu of ESG screens and licensed indexes, giving investors a wide range of portfolio design choices. In addition, our proxy-voting guidelines follow corporate-governance best practices to safeguard shareholder capital, and they consider the relevant environmental and social implications of management and shareholder proposals.



Jennifer Sireklove

Jennifer Sireklove, CFA, Managing Director, Investment Strategy 

Jennifer leads the Investment Strategy Team at Parametric, which is responsible for all aspects of Parametric’s equity-based investment strategies. In addition, she has direct investment responsibility for Parametric’s Emerging Markets and International Equity strategies and chairs Parametric’s Stewardship Committee. Previously she helped build Parametric’s active ownership and custom ESG portfolio construction practices. Prior to joining Parametric in 2013, she worked in equity research, primarily covering the energy, utility, and industrial sectors at firms including D.A. Davidson and McAdams Wright Ragen. Jennifer earned an MBA in finance and accounting from the University of Chicago and a BA in economics from Reed College. A CFA charterholder since 2006, Jennifer is a member of the CFA Society of Seattle.


The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.


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