Sustainable investing: why holdings matter more than screens

While screening can also be used more positively – to identify leaders, improvers and companies contributing to environmental or social solutions – in practice, most approaches still rely primarily on exclusions. In a world of geopolitical shocks, energy insecurity and faster-changing regulation, the limitations of a screens-first mindset are increasingly clear.

Screens matter but they are not enough. Most commonly used to reflect client values, avoid harm and set expectations, they provide a starting point, but not a complete investment approach. For investors seeking sustainable long-term returns, the defining question is not just what we avoid, but what deserves a place in the portfolio and why.

The UK’s Sustainability Disclosure Requirements (SDR) and the evolution of the EU’s Sustainable Finance Disclosure Regulation (SFDR) both emphasise clear objectives, eligibility criteria, monitoring and stewardship. Regulators are increasingly focused on the assets held in portfolios and the outcomes they deliver, rather than reliance on exclusions alone.

At its core, we see the answer to this question in active sustainability research and engagement, the vital – and arguably overlooked – partners to traditional financial analysis that help us discover resilience and opportunity in a turbulent environment.

Where static screens fall short

Static exclusion lists struggle to keep pace with shifting 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 a transition to a low-carbon energy system. Market frameworks took time to adjust.

Exclusions often miss important differences within industries. Revenue-based screens, for instance, can fail to differentiate between one electric utility that is maintaining legacy fossil fuel assets and another that is investing heavily to reduce carbon emissions and diversify its revenue mix. Without analysing capital allocation, asset quality and strategy, capital risks being directed away from businesses that are supporting real-world transition.

Exclusions primarily focus on managing risk, but on their own they do little to identify the drivers of long-term value. Indeed, screens can’t 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.

Holdings-centered, forward-looking analysis

Clients will continue to seek reassurance that their capital avoids certain industries or controversies. But exclusions alone risk missing the more important question: how capital is allocated within a portfolio, and which businesses are best positioned to deliver sustainable long-term returns. In other words, if screens define the guardrails, the real investment challenge is what sits inside them. That requires a forward-looking, holdings-level assessment of how companies create value, adapt and build resilience over time.

First, do products and services address environmental or societal needs in a way that supports long-term growth? Businesses aligned with structural trends, such as ageing populations, energy resilience, or healthcare demand are often better positioned for durable expansion.

Second, how are key operational metrics evolving? Snapshots can be misleading. Trends in resource efficiency, staff engagement or customer outcomes may provide a clearer view of progress and competitiveness than a single data point.

Third, what do capital allocation decisions reveal? Choices around investment, acquisitions and divestments indicate where management sees future growth and how it’s positioned for a transition to a lower-impact economy. For example, a mining company divesting thermal coal assets and increasing exposure to copper is actively reshaping its portfolio for a lower-carbon future.

Finally, are governance and incentives aligned? Structures that link remuneration to long-term financial and sustainability outcomes can encourage better decisions and reduce the risk of short-termism.

This shift is also being reflected in regulation, including the UK’s SDR and the EU’s SFDR. These frameworks increasingly emphasise transparent, evidence-based disclosure of portfolio holdings, sustainability characteristics, impacts, and investment processes, rather than relying solely on static rules.

These characteristics sit beyond the reach of screens. They can be assessed through detailed, ongoing research and engagement.

Final thoughts…

Screens have an important place in sustainable investing. Used well, they set clear boundaries, reflect client preferences and help to avoid harm. In some cases, they also support the identification of leaders, improvers and solution providers.

However, sustainable investing is not a pass-fail exercise, nor is it defined by a static list. A more grounded approach is required – one rooted in a clear understanding of underlying holdings, how businesses create value, and how they are evolving over time.

In a world shaped by geopolitical uncertainty, shifting trade dynamics and structural challenges (such as ageing populations), understanding the sustainability and resilience of business models is becoming more important. Focusing on what is owned, rather than only what is excluded, provides a more grounded foundation for long-term investment decisions – and one that better reflects how capital is allocated in the real world.