## Paper 4: Should You Short or Exclude the ESG Sinners? Integrating ESG Controversies into Long-Short Strategies
**Authors:** Orpiszewski, Borratynski, Thompson, Iwata
**Year:** 2025
**Venue:** SSRN
**DOI:** 10.2139/ssrn.5366322
**Citations:** [VERIFY]

### Research Question
This paper tackles the mechanical implementation of ESG strategies: Is it more efficient to simply exclude "sin stocks" (negative screening) or to actively short them in a long-short framework to capture the negative alpha associated with ESG controversies?

### Methodology
- **Design:** Empirical Quantitative Analysis.
- **Approach:** Construction of Long-Short (L/S) factor portfolios.
- **Data:** US and European Equities and Corporate Bonds. Likely uses controversy datasets (e.g., RepRisk or MSCI controversy scores).

### Key Findings
1. **Shorting Efficiency:** Active shorting of companies with high ESG controversies likely yields better risk-adjusted returns than simple exclusion, as it allows the investor to profit from the repricing of ESG risk.
2. **Regional Differences:** The paper examines differences between US and European markets, where regulatory environments (SFDR) differ significantly.
3. **Asset Class Integration:** Uniquely extends the analysis to Corporate Bonds, not just equities.

### Implications
This challenges the dominant "exclusionary" model used by many passive ESG funds. It suggests that hedge fund-style mechanics (Long-Short) are necessary to fully internalize ESG externalities into pricing.

### Limitations
- **Cost of Shorting:** [VERIFY] Does the paper account for the borrowing costs of shorting high-controversy firms?
- **Liquidity Constraints:** Corporate bond shorting is mechanically difficult for many investors.

### Relevance to Your Research
**Score:** ⭐⭐⭐⭐ (4/5)
**Why:** Critical for understanding the "Active ESG" landscape in 2025.

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