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Environmental, Social, and Governance (ESG) practices are becoming central to firm evaluation, though their financial impact is debated. Investors use positive, negative, or combined screening to assess ESG criteria. Negative screening, rooted in religious practices, excludes sectors like tobacco, alcohol, and gambling but may limit options and underperform ‘sin’ stocks. Positive screening favors companies excelling in ESG, offering diverse strategies and potentially better risk-adjusted returns. This study analyzes investor preferences for ESG screening in U.S. mutual funds from 2002 to 2020. Funds with positive screening attract higher net flows overall, with returns similar across all screening types. Retail investors are less (more) sensitive to positive (negative) screening than institutional investors. Flows to funds with positive screening rise during bear markets. During the bear market, positive screening also outperforms combined screening in net flows, while negative and combined screenings show no significant differences.
Agapova et al. (Tue,) studied this question.