Should you Short or Exclude the ESG Sinners? Integrating ESG Controversies into Long-Short Strategies for US and European Equities and Corporate Bonds Authors and affiliations

Abstract

Companies involved in ESG controversies are exposed to increased volatility and reputational problems, yet research around ESG investment strategies remains constrained to long-only approaches. This study examines the integration of ESG controversy data into long-short equity and corporate bond strategies in the US and Europe. Utilizing RepRisk ESG data and FIS Global shorting data, we construct long-short and exclusion strategies around company-induced ESG controversies. Our findings show that shorting and excluding ESG-controversial firms both enhance risk-adjusted returns, improving Sharpe ratios and drawdowns slightly. Including the short into ESG strategies also significantly reduces the portfolio ESG risk. These results provide a robust empirical framework for incorporating ESG incident risk into systematic long-short portfolio management across asset classes. Highlights • Consistent framework for long-short and exclusion strategies based on ESG incidents • ESG-oriented event-driven shorting strategies implemented for equities and corporate bonds • In the US, long-short and exclusion ESG strategies outperform benchmarks and reduce the ESG risk

Keywords: long-short credit, long-short equity, short selling, ESG news

JEL Classification: G11, G12, G14