In today's investment landscape, the methods we use to select assets shape not only our financial returns but also the focus and composition of our portfolios. While screening is often associated with ESG (Environmental, Social, and Governance) investing, it extends beyond sustainability metrics. Any measurable characteristic—such as financial ratios, risk assessments, operational practices, or innovation indices—can be employed in positive or negative screening, providing new opportunities for tailored portfolio construction.
Leveraging Diverse Data Sources
Modern portfolio construction benefits from an unprecedented wealth of data. Investors can leverage:
· Financial Metrics and Factor Exposures: This encompasses any traditional financial metrics such as price-to-earnings (P/E) ratios, debt levels, and profit margins, which provide insights into a company's financial health and valuation. It also includes investment styles or factors like value (undervalued stocks), momentum (stocks with rising prices), and quality (financially robust companies).
· ESG Datasets: Including environmental impact, social responsibility, and governance ratings, as well as carbon emissions data, which help assess a company's sustainability practices.
· Custom Insights from Atlas Intelligence: AI-powered analytics that generate unique insights into company practices, innovation, and strategic positioning, offering a more customized layer of analysis beyond traditional datasets.
This combination of established datasets and innovative analytical capabilities enables investors to implement sophisticated screening approaches across any theme or metric they can measure.
Two Complementary Approaches to Portfolio Construction
Negative Screening: The Exclusionary Approach
Imagine starting with a complete market index and carefully removing elements that don't meet your criteria. This is negative screening in action—an exclusionary approach that typically results in portfolios that closely mirror market indices while avoiding specific risks or characteristics.
The effectiveness of negative screening lies in its ability to maintain broad market exposure while systematically excluding undesirable elements. After excluding companies that don't meet your criteria, what remains is often a well-diversified portfolio that maintains market-like characteristics. This can be achieved using various datasets or enhanced with Atlas Intelligence's deeper analysis of company practices and policies.
Positive Screening: Active Strategy for Targeted Exposure
Positive screening represents a more active investment approach. Instead of starting with everything and removing the undesirable, you actively seek out companies that excel in specific areas. This approach typically results in more concentrated portfolios that can deviate significantly from market indices, much like other active investment strategies that seek to identify superior companies based on specific characteristics.
With positive screening, investors can pursue three distinct objectives:
- Thematic Market Views: Targeting companies positioned to benefit from specific market trends or technological advances
- Impact Investing: Focusing on companies actively contributing to positive societal or environmental change
- Active Investment Strategy: Using positive screening as a systematic approach to identify companies with superior characteristics, similar to other active investment styles like quality or growth investing
Real-World Applications
Let's explore three concrete examples of how both screening approaches can be applied:
Energy Sector Transition
- Negative Screening: Exclude companies heavily reliant on outdated energy sources, reducing portfolio risks associated with regulatory changes and market shifts.
- Positive Screening: Target companies leading in innovative energy technologies, combining traditional financial metrics with Atlas Intelligence's analysis of innovation and transition strategies.
Children's Rights
- Negative Screening: Remove companies with documented children's rights violations using established controversy datasets and supply chain assessments.
- Positive Screening: Focus on companies that actively promote children's welfare, identified through Atlas Intelligence's analysis of company policies, products, and practices.
Quality Factor Investing
- Negative Screening: Exclude companies with poor financial metrics using traditional data like debt levels, cash flow generation, or profit margins.
- Positive Screening: Target companies showing superior quality characteristics through a combination of established financial metrics and Atlas Intelligence's analysis of business model sustainability.
Strategic Portfolio Construction
The choice between screening approaches—or their combination—depends on your investment objectives:
Index-Aware Approach (Often Using Negative Screening)
- Maintains market-like exposure
- Reduces specific risks
- Provides stable, benchmark-aware returns
- Suitable for large, core allocations
Active Approach (Using Positive Screening)
- Creates concentrated exposure to desired characteristics
- Seeks outperformance through systematic security selection
- Higher tracking error relative to benchmarks
- Appropriate for targeted allocations or as a complete active strategy
- Can be used as a primary investment approach, similar to other active styles
Practical Implementation
Modern portfolio construction doesn't require choosing between negative and positive screening. Instead, investors can:
- Initial Screening with Established Datasets: Utilize traditional financial metrics and ESG datasets available on the Atlas platform to filter potential investments.
- Enhance with Atlas Intelligence: Apply Atlas Intelligence's AI-driven insights to assess deeper company practices, innovation potential, and sustainability strategies.
- Combine Screening Methods: Integrate both negative exclusions and positive selections based on your specific investment objectives, creating a balanced and purposeful portfolio.
- Monitor and Rebalance: Continuously track portfolio performance and thematic relevance using Atlas’s monitoring tools, adjusting as necessary to align with evolving market conditions and investment goals.
Conclusion
The power of modern screening approaches lies in their flexibility and precision. By combining established datasets with Atlas Intelligence's analytical capabilities, investors can build sophisticated portfolios that align with their strategies and market views while pursuing their desired outcomes effectively.
The future of investing lies in this nuanced approach to portfolio construction—where any metric, whether from traditional sources or innovative analysis, can be leveraged for either positive or negative screening. This flexibility allows investors to precisely craft portfolios that reflect both their investment philosophy and their specific objectives, while maintaining the rigor of established investment processes. The Atlas platform offers end-to-end services—from strategy construction to portfolio management—tailored to accommodate any combination of screening approaches, aligning precisely with your investment objectives.
Mattias Lagerspetz
