Traditional financial analysis is an important starting place in evaluating potential investments. Portfolio screening is an added layer of investment analysis that evaluates companies on environmental, social, and governance (ESG) factors.
Environmental screens help analysts evaluate environmental impact by looking at quantitative variables like carbon emissions and environmental fines, as well as qualitative commitments to sustainability and green business practices.
Social screens may evaluate companies on the strength of their human rights policies and consider whether a company operates in regions of armed conflict or human rights abuses. Investors consider issues of environmental justice, social license to operate, and product safety. Social analysis helps identify companies with stronger non-discrimination policies and better employee relations.
Governance screens examine the culture of a company. How does the company make decisions regarding executive compensation, salaries, and benefits? Does the company value gender and racial diversity on its corporate board? Analysts may consider legal issues a company has faced related to discrimination, fair lending, or other ethical issues.
Seeking better companies can involve applying negative or positive screens. Negative screens exclude companies that don't meet certain standards for environmental sustainability, human rights, or employee relations. Positive screens can identify best in class performers or companies in specific sectors such as renewable energy. Some funds and managers may screen out companies involved in nuclear power or animal testing, while others may decide to reflect different ESG priorities in their investment processes.