That process has evolved so that it is now less influenced by moral factors and is now influenced more by risk management, said Blume. Appleseed now screens out all fossil fuel companies, as well as systematically important financial institutions, not merely because their investors might find them objectionable, but because ESG screens favor lower-risk companies that should, over time, enhance returns.

“Then we asked ourselves, why stop with negative screening?” Blume said. “If we believe that screening out companies will reduce risk and enhance returns, then logically, wouldn’t short-selling some of those companies we screened out earlier also increase returns and reduce risk?”

In 2014, Appleseed launched a global long-short ESG strategy available in separate accounts and via a private fund. Like many long-short strategies, its short strategy involved finding companies with attributes like weak balance sheets, high valuations and high insider selling, but Appleseed goes one step further.

“We don’t think those normal things are sufficient for actually shorting a company,” Blume said. “There needs to be some catalyst to drive shares down. We started looking for ESG miscreants: bad ESG performance with high valuations.” The firm looks at three kinds of problematic practices—those that are unethical, unsustainable or unsafe.

The firm’s short candidates are companies with high regulatory risks that engage in self-serving behavior and suffer from poor corporate governance, all characteristics that Blume referred to as “value destructive.” Valeant, the pharmaceutical firm once headed by Martin Shkreli, was among Appleseed’s short calls because of its governance and self-serving behavior, Blume said. Corecivic, the nation’s largest prison provider, was another short call because of the unsustainability of the private prison industry.

Extolling The Wisdom Of ESG Fixed Income Strategies

Sage Advisory, which has $10 billion in assets under management, held in 2,000 client accounts, has run socially responsible fixed-income strategies for 15 years, making it an early player in a still miniscule fixed-income ESG market. While the firm’s security selection process has always included a social responsibility and corporate governance screen across all of its strategies, Sage now offers ESG in taxable and tax-sensitive fixed income, as well as global equities, to its clients via separate accounts.

Smith notes that out of 1,650 fixed-income funds with over $3.6 trillion in assets, there are only 42 socially responsible fixed-income funds, or 2.5 percent of the total, representing just $17 billion, a mere half of a percent, in assets.

“There’s a lot of potential,” said Smith. “The numbers are way on the short side, but we believe that debt is where you can have the greatest potential impact and the best chance to outperform.”

In partnership with Sustainalytics, one of the largest ESG ratings firms, Sage introduced one of the first ESG optimized core investment-grade fixed-income indexes. The index matches the sector allocation of a conventional benchmark, but only includes securities issued by companies with ESG scores in the 87th percentile or higher.