Negative Screening vs. Materiality

What is negative screening?

• Definition: Avoiding sectors, companies, or activities considered harmful (e.g., tobacco, fossil fuels, controversial weapons).
• Strengths: Simple, easy to apply, clear to explain to LPs.
• Limitations:
  • Avoids “bad actors” but doesn’t promote positive change.
  • Risks accusations of greenwashing if presented as full ESG integration.
  • Misses sector-specific risks and opportunities.

What is materiality?

• Definition: Identifying and acting on the ESG issues most relevant to a company’s sector, stage, and strategy.
• Types of materiality:
  • Financial materiality → ESG issues that affect company performance (e.g., retention, compliance costs).
  • Impact materiality → Company’s effect on society/environment (e.g., emissions, human rights).
  • Double materiality → EU standard requiring both lenses.
• Why it matters:
  • Makes ESG actionable and sector-specific.
  • Helps founders see ESG as growth infrastructure, not admin.
  • Aligns with SFDR Article 8+/9 requirements.

Key takeaway: Screening says “what we won’t invest in.”

Materiality says “what really matters for this business model, and how do we measure it?”

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Applying materiality across the investment lifecycle

Once you move beyond screening, ESG must be built systematically into investment practices. Here’s how it works at each stage.

During pre-investment (due diligence and screening)

• Focus: Eligibility and intent.
• Key checks:
  • Exclusion lists → any deal-breakers?
  • Founder intent → what problem are they solving, what change do they want to drive?
  • Early ESG signals → DEI, supply chain ethics, cybersecurity, data policies.
• Materiality lens here is light: Are the ESG issues the founder is tackling (or ignoring) relevant to their sector and strategy?
• Example: In healthtech, even at Seed stage, clarity on patient safety and ethics is expected.

During ownership (post-investment)

• Focus: Execution and prioritization
• This is where materiality becomes systematic.
  • Identify which ESG issues are most material to each portfolio company (sector + stage).
  • Translate them into KPIs (e.g., pay equity, carbon footprint, cybersecurity).
  • Build into a 100-day plan and longer-term roadmap.
• Now materiality is about: “Which ESG levers, if improved, will protect value, unlock growth, or strengthen resilience for this company?”

Example: For a B2B SaaS scale-up, material ESG issues may shift from “basic DEI policies” to employee retention, cybersecurity, and energy efficiency of data centers.

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During portfolio management (integration in practice)

• Focus: Monitoring and enablement
• Once ESG priorities are identified, funds must embed and track them consistently.
• Key actions:
  • Systematic tracking → monitor KPIs across portfolio companies (SaaS = data breaches; climate tech = emissions; fintech = AML violations).
  • Support founders → provide templates, workshops, and software to simplify reporting.
  • Link to business value → show how ESG drives customer trust, efficiency savings, and compliance readiness.

ESG integration is not about reporting alone, it’s about proving how it strengthens both operations and valuation.

Case in point: Companies embedding ESG often see stronger employee retention and customer acquisition, two levers that directly increase valuation multiples.

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During Exit (Valuation Narrative)

• Focus: Quantifying outcomes and proving ROI
• By exit, ESG is no longer just a compliance requirement, it’s part of the investment story.
• Key actions:
  • Quantify impact → emissions reduced, diversity metrics, certifications achieved.
  • Highlight ROI → link ESG outcomes to cost savings, risk reduction, or market expansion.
  • Leverage external benchmarks → B-Corp, ISO, or SBTi certifications build buyer confidence.
• Buyers increasingly apply ESG screens during M&A. Strong ESG credentials can secure higher multiples and smoother exits.

Why going beyond screening pays off?

• Fundraising: Many LPs now require Article 8+/9 as baseline.
• Operations: ESG improvements cut costs and increase resilience.
• Talent: ESG-driven firms attract and retain stronger teams.
• Valuation: PRI estimates ESG integration can add 6–7% to exit multiples.
• Regulatory readiness: Early ESG adoption prepares for SFDR, CSRD, and future rules.

Negative screening is a useful filter, but it is not integration

Materiality is the bridge from “what not to do” to “what actually matters.”

By embedding material ESG factors into due diligence, ownership, portfolio management, and exit, funds can move beyond compliance to create real value for LPs and companies.

👉 With Planicorn, ESG integration doesn’t have to be heavy. From KPI selection to annual disclosures, reporting can be standardised and completed in under 30 minutes. Contact Us to learn more.