Ethical stock screening: how a company passes or fails

The lesson in plain words

The same lesson as the slides above, written out in full.

1. What ethical screening actually does

Welcome. In this lesson we look at how investors keep their portfolios in line with their values by screening companies before they ever buy in. The idea is simple: a company is checked against a clear set of rules and either passes or is set aside. Think of it as a thoughtful filter you apply once, so the rest of your investing can stay focused.

• Values-based screening checks a company against a set of principles before it enters your portfolio.
• It answers two plain questions: what the business does and how its books are structured.
• Anyone who wants their money to reflect their values can use this lens, whatever those values are.
• A company either passes and stays eligible, or fails and is set aside.
• Screening is a filter, not a forecast: it decides eligibility, not whether a stock will rise.

A quick note: This is financial education only, not financial advice. Screens decide whether a company is eligible under a set of values, not whether its stock will go up or down. Always do your own research or speak to a qualified professional before investing.

2. Screen one: what the business does

The first thing a values screen asks is what the company actually does for a living. If the core business sits in an excluded area, like gambling or interest-based lending, the company is set aside no matter how well it is run. The focus is on where the revenue mainly comes from, so a tiny, incidental slice of activity is often judged differently from a company built entirely around it.

• The first filter is a business-activity screen: it looks at what the company actually sells.
• Certain industries are excluded up front, such as gambling, interest-based lending, or adult content.
• The test is usually about the core revenue: where the money mainly comes from.
• A small, incidental amount of activity is often judged differently from a company built entirely on it.
• Companies whose main business is acceptable move on to the next stage.

3. Screen two: what the finances look like

The second filter turns to the balance sheet. Even a company with an acceptable business can carry so much debt, or earn so much from interest, that it no longer fits many value systems. So each ratio is measured and compared against a set limit. Stay under the line and the company stays eligible; cross it and the company fails this stage.

• The second filter is a financial-ratio screen that reads the balance sheet, not the product.
• It caps how much debt a company carries relative to its size.
• It also limits interest-based income, since money earned from lending sits uneasily with many value systems.
• Each ratio is compared against a set limit, and staying under keeps the company eligible.
• Crossing a limit is a fail, even if the business itself was fine.

4. Clearing both gates: pass or fail

To be considered, a company has to clear both gates. Pass the activity screen but fail on the ratios, and it still drops out, and the same is true the other way around. This gives you a clear, repeatable pass or fail instead of a hunch. And because businesses and balance sheets change, good screens are re-run over time rather than set once and forgotten.

• To pass, a company must clear both gates: the activity screen and the ratio screen.
• Failing either one is enough to set the company aside.
• The result is a clear, repeatable pass or fail rather than a gut feeling.
• Screens are re-run over time, because a company's activities and finances change.
• Passing the screen means eligible to consider, not a recommendation to buy.