Definition

A process for determining which investments are or are not permitted in a portfolio by applying rules based on defined criteria.

Screening rules

Screening rules can be set by clients, chief investment officers, regulators, and others. Because screening rules prescribe whether an investment is permitted in a portfolio, screening is often subject to compliance oversight. Screening rules can be qualitative or quantitative and may incorporate implementation requirements.

For example, they may stipulate the timing or conditions for selling any investments that cease to meet the screening criteria.

Screening criteria

Screening criteria can be based on various investment characteristics, including environmental, social, and governance (ESG) characteristics.

For example:

Whether a sovereign issuer achieves a given human rights performance score (e.g., 40 out of 100) from a specific ratings provider

Whether =10% of an issuer’s revenue is from the production and/or sale of tobacco products

Thresholds

Thresholds are an essential element of any quantitative screening criteria. Thresholds can be absolute, relative, or relative to peers.

For example, a Scope 1 carbon dioxide emissions screen threshold may be:

carbon neutrality (absolute threshold),

200 tons per USD1 million revenue (relative threshold), or

the industry average carbon intensity (relative to peers threshold).

Screening rules

Screening rules categorically determine whether individual investments are permissible in a portfolio. They do not apply to the aggregate portfolio.

For example, a screen using governance scores would stipulate the necessary governance score of each investment, not the average governance of the investments in a portfolio.

Common types of ESG Screening

Exclusionary Screening/ Exclusions

1. Applies rules
2. Based on ESG criteria
3. That determine whether an investment is not permitted

Negative Screening

1. Applies rules
2. Based on “undesirable” ESG criteria
3. That determine whether an investment is not permitted

Positive Screening

1. Applies rules
2. Based on “desirable” ESG criteria
3. That determine whether an investment is permitted

Best-in-Class Screening

1. Applies rules
2. Based on ESG criteria that are “desirable” relative to peers
3. That determine whether an investment is permitted

Norms-Based Screening

1. Applies rules
2. Based on Compliance with widely recognised ESG standards or norms
3. That determine whether an investment is or is not permitted