Advisers increasingly taking a more holistic approach to ESG screening

VanEck’s sixth annual smart beta survey found that 45.8 per cent of advisers and brokers used positive screening, alongside a further 41.5 per cent musing negative screening in 2021 — an increase on the 43 per cent and 36 per cent, respectively, clocked a year earlier.

Commenting on the findings, Matt McKinnon, head of business development, Asia Pacific, at VanEck, explained that using both schools of thought is increasingly viewed as the bare minimum requirement for ESG portfolio construction.

“Negative screens are important for excluding entire sectors like weapons manufacturers or companies that are simply high carbon emitters,” Mr McKinnon said.

“Positive screens help identify the companies with high ESG credentials and consider the overall impact of that company, ensuring the fund appropriately aligns with investors’ values.”

But Daniel Stojanovski, head of research at Centrepoint Alliance, cautioned advisers to ensure they’re taking a more holistic approach that factors in the various ESG styles.

He warned that by having a bias to both positive and negative screening, investors greatly increase cyclicality to certain sectors.

“Like traditional portfolio construction, we need to take an approach that factors in the various responsible investing styles,” Mr Stojanovski said.

According to Centrepoint’s research, two schools of thought have been observed among advisers. The first came from early adopters to responsible and ethical investing focused on negative/positive screens, while the second is more recent and focuses on impact investing.

“The conversations we have with advisers and their clients are to have a responsible investing portfolio process that factors in the various ESG styles that can be used in the space, taking a holistic approach allows for greater diversification and lowers the level of cyclicality a portfolio may exhibit if they only had negative or positive screens,” Mr Stojanovski said.

“By using both schools of thought in responsible investing, we allow for better client conversations, while achieving a client’s ESG and investment objectives.”

While touting the importance of striking a balance between positive and negative screening, Mr McKinnon also highlighted the need for “deep, comprehensive analysis” across the full spectrum of environment, social and governance metrics to assess a company’s true ESG credentials.

“The world isn’t static and neither can your ESG fund be,” he concluded.