SRI Trend #1: The movement away from Negative Screening, towards Positive Screening
1. SRI was traditionally known, sometimes with detest, for its use of Negative Screening. In other words, investors typically avoided “bad” companies, and their associated “sin stocks” including the usual suspects of Alcohol, Weapons and Tobacco. However, according to the Social Investment Forum, there’s actually a “laundry list” of negative themes. From largest to smallest in terms of usage, this includes Tobacco, Alcohol, Labor, Environment, Weapons, Gambling, Human Rights, Pornography, Animal Testing, and even Abortion (though this is quite rarely used).
I have issues with such a screening, especially when one considers that Corporations are just like people. Similar to the characters of people, there is no such thing as a “perfect” person, and both companies and people are highly complex. An ideal-like company that produces Solar Panels, may also be emitting significant amounts of chemicals and other pollution during its production process. Further, some companies operate in relatively green-friendly industries (i.e, business services) compared to others (oil refining) that are handicapped by default. And weapons are required to protect the freedoms of peoples living in hard-earned democracies.
Positive Screening has become far more popular over the last decade given its flexibility, and fluidity of investing. It also takes into account the positive qualitative aspects of corporations and their forward momentum thereof. Thus, a detested company like Wal-Mart, which has taken numerous efforts to change its ways, could be an ideal candidate. Within Positive Screening, recent trends favor employee relations and corporate governance. Such screening requires significantly more analysis than Negative Screening, which simply eliminates “Sin Stocks” – no questions asked.
According to Sentinel Investments, for example, one would screen for companies that have: good business practices including being responsive to customer and public concerns, and which have strong operating records, such as quality control, safety and compliance. Corporate Governance covers board composition and executive management. Thus, board diversity and independence are examined. Environmental Performance is evaluated for overall stewardship, and reducing “footprint.” Diversity (of labor) examines policies, and practices. Human Rights records are examined for large corporations such as Nike that operate in several countries. Lastly, a company’s involvement in its local Community is examined, including the degree that it encourages volunteerism. Positive Screening will be employed in this website’s investment recommendations.