Fixed income investors apply ESG filters or screens to their investment universe to control which issuers or securities are considered for investment. This is an effective way of ensuring their investments are aligned with their (client’s) ethical motivations and reduces reputational risks.

There are three common types of ESG screening:

1) Negative/exclusionary screening

  • The exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria

2) Positive/best-in-class screening

  • Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers

3) Norms-based screening

  • Screening of investments against minimum standards of business practice based on international norms

“We can exclude some issuers from our investment universe that are out of line with our promise to clients. The portfolio managers decide, among what is left, the financial and ESG risk that they are going to take.”

Thomas Kjaergaard, Danske Capital

Key considerations for screening

  • Determine what proportion of a company’s revenue derived from a screened activity or sector would qualify an issuer for exclusion.
  • Ensure that the ESG data on which screening is based is robust and reviewed regularly.
  • Consider possible implications of screening, such as portfolio concentration, for smaller investment universes (e.g., G7 government bonds).
  • ESG risks typically flow down from parent company to subsidiary, special purpose vehicle or project, and so screening should relate to parent companies first.
  • Screening may be an effective elast resort to an ongoing engagement process to influence ESG management by issuers.
  • Concepts of positive screening based on environmental performance and environmental themed investing are essentially interchangeable.

Below we summarise some examples of ESG, norms-based and positive screening for different types of issuers.


Screening can be applied universally across all assets or to specific mandates or funds. Many investors have developed ethical, ‘green’, socially responsible or SRI bond funds that apply ESG screening.


Investment manager Danske Capital screens its government bonds universe based on the World Bank’s Worldwide Governance Indicators (WGI). It excludes lower-scoring countries except for cases where bond financing will clearly help to improve those scores.

When applying screening, sub-nationals, local governments and government agencies should be considered separately from the countries in which they operate.

Financial sector

KfW Bankengruppe excludes banks that own more than 10 percent of companies operating in sectors on the IFC Exclusion List. The same process is applied for ABS originators.

The US Conference of Catholic Bishops (USCCB) “will not deposit funds in a financial institution that receives less than a ‘satisfactory’ rating from federal regulatory agencies under the Community Reinvestment Act” (CRA). This CRA is a federal law aimed to encourage lending that meets the needs of the communities in which banks operate.

Ethical/reputation screens Revenue derived from:
  • Tobacco
  • Controversial weapons
  • Nuclear energy
  • Pornography
  • Arms
  • Gambling
  • Alcohol
  • Animal testing
  • Adherence to international standards on human rights and environmental issues
  • Use of capital punishment
  • Financing or ownership of business activities listed under corporate criteria (on left)
  • Origination of ABS financing business activities listed under corporate criteria (on left)
  • Predatory lending
  • Aggressive tax avoidance schemes or consultancy
Norms, standards and international laws 
  • Illegal activities
  • Export controls
  • International Labour Organisation conventions
  • UN Global Compact Standards
  • Trade embargoes
  • US, EU, UN sanctions
  • ILO conventions
  • Human rights conventions
  • Montreal Treaty
  • Kyoto Protocol
  • World Governance Indicators
  • Ottawa Treaty (antipersonnel mines)
  • Convention on Cluster Munitions (CCM)
  • Export controls
  • Whistle-blower policy
  • Regulatory compliance
  • Community Reinvestment Act (US)
  • IFC Performance Standards
  • Equator Principles
  • International sanctions

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