New research from Florida Atlantic University College of Business indicates that investors are increasingly favouring positive ESG screening over traditional exclusion-based approaches, particularly during periods of market uncertainty.

The study finds that while negative ESG screening – excluding so-called “sin stocks” – has historically dominated due to its simplicity and clearer legal framing, both retail and institutional investors are now gravitating toward strategies that actively select companies with higher ESG scores. This shift reflects a growing belief that sustainability factors can play a meaningful role in managing downside risk.

From Exclusion to Selection

According to the research, positive screening offers structural advantages over exclusionary models. By widening the investable universe rather than narrowing it, positive ESG screening allows for greater diversification, which in turn improves risk-adjusted returns. Surveyed investment managers acknowledged that while negative screening remains common, it can constrain portfolios and potentially weigh on performance.

The findings suggest that investors increasingly view ESG performance as a proxy for operational resilience, particularly exposure to physical and transition risks such as climate-related disruptions, regulatory changes, and governance failures.

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Performance in Market Downturns

The study highlights that ESG-focused portfolios tend to be less volatile and more resilient during financial stress, outperforming traditional portfolios in downturns. Companies with stronger ESG profiles were found to have lower downside exposure, helping mitigate losses when markets become unstable.

This dynamic is particularly relevant in uncertain macroeconomic environments, where investors prioritise capital preservation alongside returns. Positive ESG screening, by identifying companies better positioned to manage long-term risks, appears to align with these objectives.

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Implications for Fund Managers

While legal and operational simplicity has historically favoured negative screening, the research indicates that investor preferences are now firmly shifting. Both retail and institutional investors are allocating more capital to funds that use positive ESG screening frameworks.

For asset managers, the study suggests a need to re-evaluate product design and portfolio construction. Aligning strategies with investor demand for sustainability-driven risk management could become a competitive differentiator, especially as ESG considerations move from ethical preference to financial rationale.

Overall, the findings reinforce a broader trend in sustainable finance: ESG integration is increasingly viewed not just as a values-based choice, but as a tool for diversification, resilience, and long-term risk management.

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