Man Group makes argument for shorting based on ESG

What does responsible investing need to do to become fully mature? Go short.
June 2020

To some, responsible investment is a goody-goody exercise. You buy some stocks that you think are ‘responsible’ – exclude tobacco, include renewables, try not to buy anything that makes nuclear weapons and voila! A responsible investment portfolio, spotless and morally unimpeachable.

But is that enough?

We would argue that there is more that can be done to improve the quality of RI portfolios. It’s not just about identifying those companies that are making the world a better place. To take a leaf out of Mark Baum’s book, it’s also about shorting those companies that are harming the environment, not treating their employees and customers fairly or their shareholders well.

In this article, we will explore the dark side of responsible investing, focusing on the companies who perform poorly on environmental, social and governance (‘ESG’) metrics. Part I evaluates the effect of exclusion lists, currently the most popular way to exploit a negative view of the ESG performance of a stock. We examine the historical performance of exclusion lists and delve into the specific drivers of performance, in particular the impact on some of the most excluded industries. We also attempt to estimate the cost to a portfolio of divesting from some of the popular restricted names.

Part II takes things one step further and looks at the impact of expressing those negative opinions in a more direct way: shorting the worst offenders in ESG. We cover how shorting increases portfolio exposure to ESG themes, impacts on returns and affects drawdowns compared with a long-only implementation.

The full article is available at https://www.man.com/maninstitute/big-green-short

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