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Investors rediscover the joys of negative screening

October 2008

The exclusionary approach is once again popular among institutional investors, says Will Oulton

The past year or so has seen the re-emergence of negative screening – the avoidance and de-selection of ‘irresponsible’ companies from investors’ portfolios.

Given my role in responsible investment at FTSE Group I’ve seen this trend close at hand. A review of FTSE’s custom index business list, for instance, shows an increasing number of institutional investors now looking for benchmarks that exclude a sector, a particular activity or a certain group of companies. On the FTSE World Index, some investors now require the exclusion of companies involved in breaches of international labour and human rights standards.

This recent rise in the popularity of negative screening might seem surprising in light of the rapid growth over the past ten years of engagement, in which investors have exercised ownership rights to persuade businesses to act more responsibly. Many people imagined negative screening was on the wane. Why the turnaround?

Many negative screens map fairly well to a range of international conventions or accords that are becoming more important to policy makers at the intergovernmental level. In addition, some sovereign wealth funds have created transparent investment processes and policies. These are aligned with the sponsoring country’s support of internationally accepted standards of corporate and political behaviour. Prime examples are the Norwegian Government Pension Fund, and the Swedish AP funds. Some of Europe’s largest public pension funds, such as PGGM, operate to similar levels and in many cases have adopted selective screening approaches.

In addition, the US market, which has always had a strong tradition of negative screening, is becoming ever more forceful on emerging social issues such as the avoidance of investments in companies operating in Sudan. All of these factors have made negative screening more attractive.

At the same time, although engagement has developed in many northern European markets as a key element of SRI strategy, investors have often struggled with a limited engagement budget, and have concluded that they can’t cover all the ground. What’s more, some well-run companies are simply stuck in often controversial industries or countries.

It’s arguable, therefore, that we are witnessing an evolution in responsible investment. Engagement has limitations and is anyway often underpinned by the threat of divestment. As SRI matures and the investment world works through economic travails, negative screening – in conjunction with judicious engagement – becomes a more attractive strategy.


Will Oulton is head of responsible investment at FTSE Group and managing director of CRG Advisory Services. william.oulton@ftse.com




Will Oulton | Global | Risk management

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