Sustainable investing: why holdings matter more than screening criteria
16 JUL, 2026
Andrew Risk, ESG Investment Director, Developed Market Equities
Rebecca Maclean, Investment Director, Developed Market Equities
Sustainable investing has long been associated with exclusion: what should not be held in a portfolio.
Although screening criteria can also be used more positively – to identify leading companies, those that are improving, and those that contribute to environmental or social solutions – in practice, most approaches still rely mainly on exclusions. In a world marked by geopolitical crises, energy insecurity, and constantly and rapidly evolving regulation, the limitations of a screening-first mindset are becoming increasingly clear.
Screening criteria matter, but they are not enough. Used primarily to reflect client values, avoid harm, and set expectations, they represent a starting point, not a complete investment approach. For investors seeking sustainable long-term returns, the key question is not only what we avoid, but what deserves a place in the portfolio, and why.
Both the UK's Sustainability Disclosure Requirements (SDR) and the evolving EU Sustainable Finance Disclosure Regulation (SFDR) emphasize clear objectives, eligibility criteria, monitoring, and stewardship. Regulators are increasingly focusing on the assets that make up portfolios and the outcomes they generate, rather than relying solely on exclusions.
At its core, we see the answer to this question in active sustainability research and engagement – the fundamental, and arguably underappreciated, complements to traditional financial analysis that help us uncover resilience and opportunity in a turbulent environment.
Where static filters fall short
Static exclusion lists struggle to keep pace with changes in policy, technology, and social expectations. For example, nuclear energy – long avoided by sustainability funds – was defined as a taxonomy-eligible activity under the EU Taxonomy Regulation in 2022, given its potential to support the transition to a low-carbon energy system. Market frameworks were slow to adapt.
Exclusions often overlook important differences within sectors. Revenue-based screens, for example, may fail to distinguish between a utility company that retains legacy fossil fuel assets and one that is investing heavily to reduce emissions and diversify its revenue mix. Without analyzing capital allocation, asset quality, and strategy, there is a risk that capital is diverted away from companies that are genuinely supporting the transition.
Exclusions focus primarily on risk management, but on their own they contribute little to identifying the drivers of long-term value. In fact, filters cannot capture harder-to-measure factors, such as how a company treats its workforce, the strength of its governance, or whether management incentives are aligned with long-term value creation. These are often the characteristics that determine long-term business performance.
Forward-looking, holdings-focused analysis
Clients will continue to seek assurance that their capital avoids certain sectors or controversies. But exclusions alone risk overlooking the more important question: how capital is allocated within a portfolio, and which companies are best positioned to generate sustainable long-term returns. In other words, if filters define the boundaries, the real investment challenge lies in what's inside them. That requires a forward-looking, holdings-level assessment of how companies create value, adapt, and build resilience over time.
First, do the products and services meet environmental or social needs in a way that supports long-term growth? Companies aligned with structural trends – such as an aging population, energy resilience, or healthcare demand – tend to be better positioned for durable expansion.
Second, how are key operating indicators evolving? Snapshots can be misleading. Trends in resource efficiency, employee engagement, or customer outcomes can offer a clearer picture of progress and competitiveness than a single data point.
Third, what do capital allocation decisions reveal? Investment, acquisition, and divestment decisions indicate where management sees future growth and how the company is positioning itself for the transition to a lower-impact economy. For example, a mining company that is divesting thermal coal assets while increasing its copper exposure is actively restructuring its portfolio for a lower-carbon future.
Finally, are corporate governance and incentives aligned? Structures that tie compensation to long-term financial and sustainability outcomes can encourage better decision-making and reduce short-termism risk. This shift is also reflected in regulation, such as the UK's SDR and the EU's SFDR. These frameworks increasingly emphasize transparent, evidence-based disclosure of portfolio holdings, sustainability characteristics, impacts, and investment processes, rather than relying solely on static rules. These characteristics go beyond the scope of filters. They can be assessed through detailed, ongoing research and company engagement.
Conclusions
Filters occupy an important place in sustainable investing. Used well, they set clear boundaries, reflect client preferences, and help avoid harm. In some cases, they also help identify leaders, improvers, and solution providers.
However, sustainable investing is not a pass/fail exercise, nor is it defined by a static list. A more robust approach is needed – one grounded in a clear understanding of underlying holdings, how companies create value, and how they evolve over time.
In a world marked by geopolitical uncertainty, shifting trade dynamics, and structural challenges (such as population aging), understanding the sustainability and resilience of business models is becoming ever more important. Focusing on what is included, rather than only on what is excluded, provides a stronger foundation for long-term investment decisions – one that better reflects how capital is actually allocated in the real world.
