ESG Awareness and Negative Screening

Negative screening is often the next step after ESG awareness, whether adopted by choice or as a result of regulatory requirements. A clear example is the KiwiSaver default fund settings, which require exclusions for certain fossil fuel investments as defined in legislation.

Negative screening involves deliberately excluding investments in specific industries or activities. These commonly include areas such as fossil fuels, armaments, nuclear weapons, alcohol, gambling, and animal welfare concerns. While this may appear straightforward, in practice it is more complex than it first seems.

Definitions matter. The way a fund manager defines each exclusion category, and how strictly it is applied, can vary significantly. For example, a manager may exclude nuclear weapons and cluster munitions but still invest in companies involved in tactical missile systems or military drones.

Another complicating factor is materiality. Some fund managers apply a zero-tolerance approach, while others allow exposure up to a defined threshold, such as 10% or 20% of a company’s revenue being derived from an excluded activity.

Because of these differences, comparing ethical investment approaches based solely on labels or exclusion lists can be misleading. This is why Moneyworks developed its Ethical Investment Analysis framework, in conjunction with Mindful Money, to provide clarity about what is actually happening inside investment portfolios.