The Responsible Investment Benchmark Report from the Responsible Investment Association Australasia (RIAA) discovered that the reach of negative screening had increased its assets under management (AUM) from $545 billion in 2019 to $557 billion in 2020. Positive screening declined on the flip side, its AUM falling from $103 billion in 2019 to $65 billion in 2020.
Negative screening typically looks to exclude companies and products from portfolios based on certain criteria, often due to being controversial. Positive screening looks to include such products on the reverse of this criteria.
The most common themes that led to financial products being excluded in 2020 included tobacco production (excluded by 76 per cent of fund managers), controversial weapons (65 per cent) and gambling (58 per cent).
Fund managers opting to build portfolios through positive screening most commonly used renewable energy and energy efficiency (included by 73 per cent of fund managers), sustainable water management and use (63 per cent) and circular economy reuse and recycling (60 per cent), to make their investment decisions.
The report found that the users searching for negative screens on the Responsible Returns online tool for a 12-month period (January to December 2020) exceeded those looking for positive screens, driving the move seen by fund managers.
What users look to negatively screen, however, often does not line up with fund manager priorities.
The study found that the most frequently searched exclusion categories are fossil fuels (25 per cent), human rights abuses (15 per cent) and animal cruelty (10 per cent). None of these align with the top three exclusions for fund managers.
This decline within positive screening also comes as norms-based screening advances. The AUM for such screening in the market reached $219 billion in 2020, an increase of $5 billion from 2019.
This screening involves the inclusion of companies and products on the basis of minimum standards of relevant business practices, based on international norms and conventions, such as those defined by the United Nations.
Companies and issuers of securities that fail to meet universal principles set out in such conventions are often met with severe criticism, with fund managers increasingly concerned of integral and monetary risks of failure to build an inclusive portfolio.
By screening on a norms-based basis, fund managers have another tool to avoid including controversial products within their portfolios.
Fund managers building portfolios in this fashion in 2020 most commonly looked for compliance with the UN Global Compact (included by 83 per cent of fund managers), Principles for Responsible Investment (78 per cent) and the Paris Agreement (50 per cent) when selecting companies to include.
