The Big Green Short

August 26, 2022

Investors that short a company’s stock are  never popular, but there is an emerging trend of ‘shorting for good’. Based on an investor’s perceived performance of so called ‘green’, ‘ethical’ or ‘sustainable’ strategies, short sellers are calling these companies out if they consider action on decarbonisation is too slow, or worse, only window dressing.

Green shorting is a form of short selling. Short selling is a method whereby a ‘short seller’ will borrow shares from another investor. The short seller will then sell the borrowed shares on the market and buy them back prior to returning them. They will pocket any fall in value the borrowed stock might experience in the meantime as profit. Green shorting is when an investor shorts a company based on their sustainability and decarbonisation credentials. Some of these funds, such as the Plato Investment Management Global Net Zero Hedge Fund are designed to outperform broader markets while being exposed only to net zero investments are actively engaged in green shorting. It’s short selling shares in ASX 200 companies with net zero action plans that it thinks might prove difficult to pull off. Essentially, they short stocks that are higher carbon with a poor return outlook and long-stocks with lower carbon with good return averages.

US-based hedge fund AQR which boasts some of Australia’s biggest super funds among its clients, has recently suggested that they will consider using short-selling to mitigate climate risks across their portfolios. This comes in the wake of large investor divestment of holdings from major carbon emitters across Australia. Short-selling represents a more aggressive tool with which investors can flex their muscles as green influencers in the market, beyond traditional divestment strategy, which thus far has been at the core of the rapid rise of sustainable investment. Equipped with green shorting, investors are now able to behave in a way that inherently incentivises businesses to clean up their act, or risk getting left behind.

Betting against companies whose stories of helping the environment are stronger than their earnings, or against those that have exaggerated their ethical credentials, has also become increasingly attractive. Sounds sensible really. Financial markets are a fascinating study in belief, sentiment and emotion but sometimes it can create immense change. ESG these days is a must to have not a nice to have and done well brings value to both the investor in a better understanding of the ESG issues that could affect the value of the stock and the business in terms of addressing risks that may not otherwise have been on its radar. Done poorly however, it is worse than not doing it at all. Greenwashing is rife and many companies are jumping on the bandwagon of sustainability with no meaningful commitment ignoring both the benefits and the risk management opportunity. In a world that is changing by the day, where history is no longer any predictor of the future, surely it pays to be prepared and mean what you say. If nothing else, it might stop the short sellers attacking your stock. If you would like to know more about how ESG, sustainability analysis or climate risk assessment can benefit your business please get in touch with one of our expert team members.

Cress Consulting are sustainability, risk and water specialists, committed to finding the right solutions to help you secure a more sustainable, secure future. If you would like help to find the right solutions, please contact us here.

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