Negative Screening : an analysis of the cost or benefit related to screening on industries

Abstract: This thesis studies the increasingly prevalent concept of sustainability in a financial context. Specifically, the question as to whether negative screening implies a cost or a benefit from an investor perspective is derived from past research’s inconclusive findings. The method adopted in order to answer the question is the construction of a negatively screened portfolio. The negative screening is done on an industry basis to see if excluding firms that engage in activities related to ESG risks would increase or decrease portfolio performance. Costs or benefits are primarily estimated as the intercept, also referred to as alpha, from Carhart’s (1997) four-factor model but is complemented by both the CAPM and the Fama-French three-factor model. The results of this study indicate no significant findings, as measured in alpha, achieved from the negative screening. However, the findings suggest a lower Sharpe ratio in the screened portfolio, and that negative screening may be associated with a lower systematic risk similar to what previous research has found.