Understanding The Difference Between ESG Screens and Tilts
Responsible investing is an evolving space that covers a diverse set of considerations and priorities. And yet, investors have only two truly distinct portfolio construction methods to choose from1. A screen builds a portfolio out of a subset of the eligible investment universe that meets specific environmental, social and governance (ESG) criteria. A tilt reweights the eligible investment universe with respect to each company’s ESG qualities. Portfolios may be constructed using just one of these methods or a combination of both.
Both screens and tilts can enhance a portfolio’s ESG characteristics, but they are quite different in terms of how they are implemented and their impact on a portfolio. In particular, screens are necessary for mandates in which the ESG criteria are of primary importance and the list of acceptable investments must be delineated very precisely. A tilt process is useful in cases in which controlling portfolio impact is the primary concern and there is some flexibility in terms of acceptable ESG characteristics.
1 Portfolio construction refers selecting and weighting constituents for a portfolio. This is separate from the company valuation process, where the concept of "ESG integration" is relevant.