Ethical screens: what are they and how do we use them?

As more investors seek to align their financial decisions with their personal values, ethical screens have emerged as a crucial tool. Ethical screens enable people to invest in a way that better reflects their values. But what exactly are ethical screens? Where did they originate, and how are they applied in practice?

What are ethical screens?

An ethical screen is a filter applied to investments to exclude or limit exposure to companies, sectors, or regions involved in activities that conflict with an investor’s values. They help ensure that portfolios align with a person’s ethical, social, and environmental priorities.

Ethical screens are typically applied in two ways:

1. Exclusions: These screens completely avoid specific sectors or activities. For example, an investor may choose to exclude all companies involved in the manufacture of weapons.
2. Tolerances: These allow limited exposure to controversial sectors, provided companies meet specific criteria. An investor might, for instance, tolerate fossil fuel companies that are transitioning to renewable energy, provided they demonstrate measurable progress.

Both approaches can help investors maintain their ethical principles while pursuing their financial goals.

The origins of ethical screens

The concept of ethical screens has deep roots, particularly in faith-based communities. Early proponents, particularly among the Quakers and Methodists, made conscious decisions not to invest in industries such as the slave trade and certain harmful manufacturing sectors. Historically, religious organisations continued to avoid industries like alcohol, tobacco, gambling and weapons. This early form of values-based investing laid the groundwork for modern ethical screens and the broader movement of ethical investing.

As societal values have evolved worldwide, the scope of ethical screens have expanded as well. Today, ethical screens can include activities like fossil fuels, nuclear energy, animal testing, genetically modified organisms (GMO) and human rights abuses.

Geographic screens are also gaining prominence, as some investors seek to minimise exposure to countries with poor human rights records or active war zones.

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How ethical screens are applied

Ethical screens are integrated into the investment selection process to ensure portfolios align with specific ethical guidelines. This involves assessing data from third-party providers and company disclosures to identify activities flagged as ethical concerns.

In the context of ethical screens, the term ‘exposure’ is used to describe the amount an investment is linked to a particular ethical concern. There are two types of exposure, direct and indirect.

Types of exposure

1. Direct exposure: When a company is directly involved in a flagged activity, such as manufacturing weapons.
2. Indirect exposure: When a company supplies components or services used in flagged activities, such as a tech company providing software for weapons systems.

At the portfolio level, exposure is often reported as the percentage of companies linked to flagged activities. However, measuring this exposure accurately can be challenging.

Measurement methodologies

Two main methodologies are used to measure portfolio exposure:

1. Portfolio weighted average: This method calculates the percentage of companies in a portfolio linked to flagged activities. However, it often overstates exposure by treating the entire company as involved, even if its participation in a flagged activity is minimal.
2. Revenue weighted average: A more precise approach, this method considers the percentage of a company’s revenue derived from flagged activities. For example, if 3% of a company’s revenue comes from producing gun lockers, only that 3% contributes to the portfolio’s controversial exposure. While this approach provides greater accuracy, it depends on the availability of reliable revenue data, which is not always mandatory or comprehensive.

Challenges with ethical screens

Applying ethical screens effectively requires navigating several challenges:

Data limitations

Third-party data providers may lack the granularity needed to differentiate between direct and indirect exposure. In some cases, indirect exposure is misclassified as direct, overstating a company’s direct involvement in flagged activities.

Supporting transitioning companies

Absolute exclusions can sometimes hinder progress. For instance, a utility company still using coal but actively transitioning to renewable energy might be excluded under strict fossil fuel screens. However, supporting such companies can accelerate their shift to sustainable practices.

Complex sectors, like animal testing

In sectors like healthcare, animal testing is often legally required in regions such as the EU and UK. At Tribe, we use a “4-R” framework—Reduce, Refine, Replace, Responsibility—to evaluate whether companies are taking steps to minimise animal testing and improve welfare standards.

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Tribe’s approach to ethical screens

At Tribe, we believe ethical screens should be applied with transparency and rigour. Our goal is to align investments with the UN Sustainable Development Goals (SDGs) while reflecting the environmental and social change our clients seek.

• Transparency: We provide quarterly updates on portfolio exposure across various ethical screens, ensuring our clients and advisers understand the ethical implications of their investments.
• Rigour: Ethical screening is embedded in our quarterly monitoring process, helping us manage risks and uphold our clients’ preferences. We currently use the portfolio weighted average methodology to report exposure, but we continuously evaluate the quality of revenue data with the hope of transitioning to more precise reporting when possible.
• Beyond data: We recognise that data alone doesn’t tell the full story. That’s why we combine manual reviews with data-led insights to thoroughly assess companies. This is especially important for high-risk sectors or regions, where data might be incomplete or misleading.

Striking the right balance

Ethical screens are a powerful tool for aligning investments with personal and societal values. However, applying them effectively requires a nuanced approach. At Tribe, we work closely with our clients to ensure their investments reflect their ethical priorities while contributing to a sustainable and equitable future.

Whether it’s supporting companies transitioning to renewable energy or scrutinising animal welfare practices, our commitment is to help clients invest in a way that makes a positive impact.