Investors are increasingly favoring positive environmental, social, and governance (ESG) screening, particularly during periods of stock market uncertainty, according to new research from Florida Atlantic University.
The study highlights a shift from the traditional negative screening approach—which excludes certain “sin stocks”—to positive screening that actively includes companies with high ESG scores in investment portfolios. Anna Agapova, Ph.D., professor of finance at FAU’s College of Business, said, “Institutional investors are often more sophisticated in their strategies and have shown a stronger preference for positive screenings. While it is more complex, investments with higher ESG scores are able to mitigate risk better because of a lower downside exposure.”
Published in the European Journal of Finance, the research was co-authored by Uliana Filatova, Ph.D., assistant professor of finance at Grand Valley State University and Ivan Yuk, an undergraduate finance student at the University of Florida’s Warrington College of Business.
Historically, negative screening has been favored for its simplicity and legal clarity. However, surveys cited in the study indicate that many investment managers recognize negative screening can harm financial performance. In contrast, positive screening allows for greater diversification by including sustainable investment preferences and results in better risk-adjusted returns.
Agapova explained further: “We’ve found that ESG-focused investments are less volatile and better performers during financial downturns. Diversification is a key to reducing overall portfolio risk, which ESG investments naturally do. Overall, positive screening picks the best performers on ESG, who are often able to better manage financial risks as they have lower exposure to issues like flooding or property damage.”
Both retail and institutional investors now show a clear preference for positive screenings through their allocation choices in mutual funds. The study suggests fund managers should adapt their strategies to align with these investor preferences and evolving goals around risk management.
