An Example of Negative Screening Application in ESG Investing

Abstract

ESG (Environmental, Social, and Governance) investing is taken into consideration by many long-term institutional investors for their portfolios. ESG investment includes reducing stakeholder risk, relying on longer investment horizons, and targeting non-mainstream market segments. Negative screening is one of the easiest methods to construct a portfolio for ESG investing and has been widely used by investors. The Sharpe ratio is one of the most common statistics used to evaluate the expected return of a portfolio. Negative screening is an important strategy in the ESG investing landscape, enabling investors to align their portfolios with their values and potentially reduce exposure to related risks. While negative screening is straightforward, there are some limitations associated with it, making the development of more reliable methods for ESG investing increasingly important. This article focuses on developing a simple approach to ESG investing using negative screening.