The ‘Dark Side’ of ESG

Responsible investing based solely on avoiding certain stocks is a “narrow-minded way of looking at the world,” suggests Man Group’s CIO for ESG.

Illustration by II

Illustration by II

Investors should explore the “dark side” of responsible investing, going beyond the common tactic of simply avoiding stocks for environmental, social or governance reasons, according to Man Group.

“Why not short them?” asked Rob Furdak, Man Group’s chief investment officer for ESG, in a phone interview. “You get more exposure to things that matter to your set of values.”

Exclusionary screening of companies — the most prevalent way investors express their ESG views — may be costing them returns, according to research done by Man. But long-short strategies may pay off. Long bets on companies with, say, strong board diversity may help increase gains, he suggested, while shorting companies lacking diverse leadership may provide even more return.

Shorting stocks as an ESG strategy is not common, partly because some asset owners have policies prohibiting betting against companies, according to Furdak. He said some institutional investors worry about having any ties to stocks they wish to avoid — even if it’s a wager against the shares of coal, tobacco, or nuclear weapons companies they may be excluding from their portfolios.

“In the U.S., there’s a little bit more flexibility, a little bit more openness to shorting the bad companies,” Furdak said. While some asset owners are willing to “embrace the dark side of ESG,” he said others are more aligned with the typical European investor’s opposition to short selling “undesirable” companies.

[II Deep Dive: UBS Hires Ex-Point72 Money Manager as CIO of New Hedge Fund Strategy]


Responsible investing done solely through restriction lists is “a very narrow-minded way of looking at the world,” according to Furdak. Man research has found that restricted stock portfolios, with the exception of coal, have beaten the MSCI World Index over the past twenty years. And while the return gap has been narrowing over the past five years, he said the data suggest such exclusion strategies probably have hurt the investment performance of asset allocators.

Digging deeper, Man found varying performance themes for excluded stocks since 2000.

For example, tobacco stocks have seen a particularly “dramatic regime shift” over the past couple decades, according to a new paper Furdak co-authored on the research. They began with “massive outperformance in the first dozen years,” and then, “after treading water,” have significantly lagged the index over the past three years, the paper said. Nuclear companies, meanwhile, have continued to post strong performance versus the benchmark.

By shorting the worst offenders of ESG values, Furdak sees opportunity for positive change along with stronger returns. Investors don’t have to be a large shareholder of a company to capture its attention.

“Most management cares about the short-selling community because they know that short-sellers can have negative influence,” he said. “You still have management’s ear because they want to do what they can to have a positive perception of the company in the marketplace.”