Positive screening, also known as best-in-class investing, is seen as going a step further than simple exclusion. Charities might combine investment with an engagement programme designed to influence company management on issues relating to their missions. This is the attempt to influence companies through the allocation of capital, as with negative screening, and through dialogue to encourage social and environmental best practice.
Best-in-class investing is favoured by trustees who are concerned about the impact of excluding sectors on performance. But being able to engage with investors, implement social and environmental programmes and the reporting process takes an increasing amount of management time. Perhaps trustees should be asking if management time could be better spent running the business to produce good long-term returns.
Where the social and environmental issues are material, a first class management team should be leading its sector. Where these are not material, corporate social responsibility can be a distraction. Engagement programmes should separate what is in the company's business interests, such as not flouting environmental regulation, which could lead to fines, and what constitutes acceptable corporate behaviour, such as paying workers in developing countries a living wage. Confusing the two can lead to management energies being misdirected and a large amount of what has been termed 'greenwash'.
Trustees who have a greater degree of investor sophistication might also ask if companies are good investments if they are not responsible and are failing to put themselves in a good position for the future. They should encourage their fund managers to show them investment opportunities that are positioned to benefit from issues such as climate change, demographic shifts and the increasing scarcity of water.
Given that the companies we know in 2050 will not be the same ones we know today, this is likely to benefit performance. But in a fragmented market, it takes a specialist to pick the winners from the losers.
Nicola Donnelly is an investment manager in the UBS charity team.