Short selling, the next weapon for the ESG manager?

For the MAN hedge fund, responsible managers have everything to gain from taking up short selling. By attacking the less virtuous companies, rather than simply divesting themselves, they can lead them to change their practices while improving their performance.

Beyond financial considerations, short selling companies with the lowest ESG ratings represents a special form of activism for the MAN hedge fund.

The integration of environmental, social and governance (ESG) criteria into financial management strategies demonstrated its interest during the coronavirus crisis. ESG strategies have performed better than traditional strategies. They could do even better by adopting the short selling of the lowest rated securities in terms of ESG, believes Robert Furdak, the director of responsible investments of the hedge fund MAN, in a study carried out with Valerie Xiang and Diana. Zheng.

Using data for the 2013-2019 period, the three authors reconstructed the performance of a “long-short” portfolio invested in the most virtuous companies and using short selling on the less virtuous securities. By betting on the decline of the lowest rated companies in terms of ESG, this portfolio doubles its exposure to ESG factors, which is well in line with the objective of responsible management.