{"id":44304,"date":"2021-04-15T15:20:00","date_gmt":"2021-04-15T15:20:00","guid":{"rendered":"https:\/\/wp2.inovestor.com\/2021\/04\/how-to-add-esg-factors-to-your-portfolio-negative-exclusionary-screening\/"},"modified":"2021-04-15T15:20:00","modified_gmt":"2021-04-15T15:20:00","slug":"how-to-add-esg-factors-to-your-portfolio-negative-exclusionary-screening","status":"publish","type":"post","link":"https:\/\/www.inovestor.com\/en-us\/2021\/04\/how-to-add-esg-factors-to-your-portfolio-negative-exclusionary-screening\/","title":{"rendered":"How to add ESG factors to your portfolio? Negative\/ Exclusionary screening"},"content":{"rendered":"

[vc_row type=”in_container” full_screen_row_position=”middle” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/4″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][\/vc_column][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/2″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][nectar_btn size=”small” button_style=”regular” button_color_2=”Accent-Color” icon_family=”none” url=”https:\/\/account.inovestor.com\/InoAdvisor\/en-CA\/Stock\/Esg?symbol=XNAS%3AAMZN” text=”TRY ESG ANALYTICS NOW”][\/vc_column][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/4″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][\/vc_column][\/vc_row][vc_row type=”in_container” full_screen_row_position=”middle” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/1″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][vc_column_text]There’s a variety of methods to incorporate ESG factors into your portfolio. In this blog post series, we go over each of them, consider their benefits and drawbacks, and see how they can be implemented using Inovestor for Advisors.<\/p>\n

Today, we look at negative<\/em>, also called exclusionary,<\/em> screenings. Negative screening<\/span> entails <\/span>the exclusion of<\/span>\u00a0companies, sectors, or countries\u00a0<\/span>base<\/span>d<\/span>\u00a0on<\/span>\u00a0<\/span>specific activities<\/span>\u00a0that<\/span>\u00a0<\/span>go<\/span>\u00a0<\/span>against\u00a0<\/span>investors\u2019\u00a0<\/span>ethic<\/span>s<\/span>\u00a0or values<\/span>.<\/span>\u00a0<\/span><\/p>\n

In its early days,\u00a0<\/span>ESG\u00a0<\/span>exclusionary scre<\/span>ens were\u00a0<\/span>mostly\u00a0<\/span>implemented\u00a0<\/span>to target religiou<\/span>s investors<\/span>.\u00a0<\/span>Investors<\/span> would screen out companies involved in products that went <\/span>against<\/span>\u00a0their faith.<\/span>\u00a0<\/span>For example,\u00a0<\/span>tobacco, alcohol and gambling<\/span>\u00a0are among the sectors prohibited in\u00a0<\/span>I<\/span>slamic<\/span>\u00a0Finance<\/span>.<\/span> Nowadays<\/span>, <\/span>negative ESG<\/span>\u00a0screens are\u00a0<\/span>used by a\u00a0<\/span>broade<\/span>r\u00a0<\/span>audiences<\/span>,<\/span> filtering out<\/span>\u00a0<\/span>companies involved in a variety of values-based factors, like <\/span>controversial weapons<\/span> or <\/span>animal testing<\/span>.<\/span>\u00a0<\/span><\/p>\n

It<\/span>\u00a0can also be applied to<\/span>\u00a0specific<\/span>\u00a0<\/span>countries<\/span>,\u00a0<\/span>companies and\u00a0<\/span>individuals<\/span>. Many countries, including Canada, impose sanctions on other countries, organizations, or individuals that are responsible for gross violations of internationally-recognized human rights, such as extrajudicial killings<\/span>\u00a0or\u00a0<\/span>nuclear programs<\/span>. These sanctions prevent trade, financial transactions or other economic activity with the sanctioned countries. Portfolio managers can proactive<\/span>ly<\/span>\u00a0<\/span>exclude<\/span>\u00a0countries<\/span>\u00a0and companies<\/span>\u00a0<\/span>they believe are acting in <\/span>un<\/span>ethical ways<\/span>\u00a0and\u00a0<\/span>are<\/span>\u00a0<\/span>expected to be sanctioned.<\/span>\u00a0<\/span><\/p>\n

Negative ESG screening is the easiest and most widely-used way to implement ESG investing.<\/span>\u00a0By\u00a0<\/span>simply excluding companies involved in activities investors condemn<\/span>, they are presented with<\/span>\u00a0a broad investible universe cleansed from companies<\/span>\u00a0directly involved in unacceptable activities<\/span>. And, in good news, negative ESG screening<\/span>\u00a0do<\/span>es<\/span>\u00a0not wipe out\u00a0<\/span>the majority of<\/span>\u00a0the investible universe. As such,\u00a0<\/span>this is a good introductory method to ESG investing.<\/span>\u00a0<\/span>Unlike the other methods, i<\/span>t\u00a0<\/span>does not involve extensive research to iden<\/span>tify\u00a0<\/span>what each company is doing to<\/span>\u00a0be more sustainable and mitigate their ESG risks.<\/span>\u00a0<\/span><\/p>\n

The main criticism of exclusionary screens is that\u00a0<\/span>investors<\/span>\u00a0\u201c<\/span>wash\u00a0<\/span>their<\/span>\u00a0hands rather than attempt<\/span>\u00a0to solve the problems<\/span>\u201d<\/span>.<\/span> It is a passive way of dealing with ESG issues. Investors may <\/span>not<\/span>\u00a0supporting unethical companies financially, but they<\/span>\u00a0<\/span>are not\u00a0<\/span>encourag<\/span>ing\u00a0<\/span>them<\/span>\u00a0<\/span>to<\/span>\u00a0<\/span>take<\/span>\u00a0<\/span>more ethical approaches, either.<\/span> Additionally, within ESG filters, companies not <\/em>involved in immoral products are all <\/span>on the same level<\/span>, without\u00a0<\/span>actually\u00a0<\/span>rewarding\u00a0<\/span>more\u00a0<\/span>sustainable\u00a0<\/span>ones<\/span>.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

Implementation<\/i>\u00a0<\/strong><\/p>\n

As mentioned, exclusionary screening is the easiest method of incorporating ESG to your portfolio. Here are<\/span>\u00a0the steps to implement negative screening:<\/span>\u00a0<\/span><\/p>\n

    \n
  1. Define products, sectors or countries to exclude<\/span><\/li>\n<\/ol>\n

    It is important to know wh<\/span>ich products<\/span>, sectors or countries<\/span>\u00a0<\/span>your clients don\u2019t want<\/span>\u00a0<\/span>in\u00a0<\/span>their<\/span>\u00a0portfolio.\u00a0<\/span>Adding the definition of each negative product, sector or country in the Investment Policy Statement (IPS) <\/span>as part of the Know Your Client (KYC) procedures<\/span>\u00a0<\/span>help<\/span>s<\/span>\u00a0portfolio managers or investment advisors during portfolio construction or rebalanc<\/span>ing<\/span>.<\/span>\u00a0<\/span><\/p>\n

    2. Filter out all companies knowingly involved in these products <\/span>\u00a0<\/span><\/p>\n

    Once you have identified and defined which products, sector<\/span>s<\/span>\u00a0or countries to exclude, you can screen out all companies<\/span>\u00a0that are directly involved<\/span>\u00a0in negative products<\/span>. We offer a screener\u00a0<\/span>with ESG data, including<\/span>\u00a0<\/span>controversial product involvement<\/span>\u00a0of companies.<\/span>\u00a0It removes the manual and time-consuming task of identifying these companies.<\/span>\u00a0<\/span><\/p>\n

    3. Apply additional screens and models to the ethical investible universe<\/span>\u00a0<\/span><\/p>\n

    After removing companies involved in negative products,\u00a0<\/span>additional financial filters can be\u00a0<\/span>applied<\/span>\u00a0or you can apply a model to your \u201cethical\u201d investible universe to create\u00a0<\/span>your<\/span>\u00a0portfolio.<\/span><\/p>\n

    \u00a0<\/span><\/p>\n

    \"\"<\/p>\n

    Example<\/i>\u00a0<\/strong><\/p>\n

    Inovestor for Advisors’ screener has a new feature for subscribers who have the ESG add-on. It allows users to add ESG screens on top of other StockPointer’s filters as an overlay. We used this newly launched\u00a0ESG overlay to implement a negative screen. <\/span><\/p>\n

    \u00a0We\u00a0<\/span>applied the following <\/span>filter<\/span>s<\/span>\u00a0<\/span>to\u00a0<\/span>companies listed on\u00a0<\/span>NYSE and NASDAQ<\/span>:<\/span>\u00a0<\/span><\/p>\n