Hedge funds eager to prove that short-selling is a legitimate ESG strategy just got some fresh material to back their case.
A study published by the Managed Funds Association indicates that targeted short-selling campaigns could slash up to $140 billion in capital expenditure at the biggest carbon emitters in the S&P 500 Index by pressuring them to clean up their acts.
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“While the role of short-selling in ESG has long been a topic of conversation, our paper provides quantitative evidence showcasing its impact on the cost of capital for a company and effectiveness as a tool for integrating ESG into a portfolio,” Bryan Corbett, chief executive of MFA, told Bloomberg.
The analysis by MFA, which represents the alternative fund management industry, feeds into a heated debate on the extent to which short-selling can genuinely be used to support environmental, social and governance goals. A recent report from MSCI Inc. found limited evidence to back the claim that shorting raises capital costs, and questioned its value as an ESG strategy. But the hedge fund industry has been vocal in its defense, as firms jostle to ensure they don’t miss out on the billions of dollars flowing into ESG.
“Short-selling has a unique and complementary role to play in conjunction with other tools in helping investors achieve their ESG objectives,” Corbett said.
Questions around the appropriateness of short-selling as an ESG strategy coincide with a more aggressive stance from financial regulators. Authorities in Germany recently raided the offices of Deutsche Bank AG and its investment arm, DWS Group, amid allegations of greenwashing. And over the weekend, news broke of a US Securities and Exchange Commission probe into ESG claims by the asset management unit of Goldman Sachs Group Inc.
At the same time, a lack of clear regulatory guidelines around ESG is a concern, according to Sonali Siriwardena, partner and global head of ESG at law firm Simmons & Simmons. “Short exposures, how is that to be treated? What about private investments which have limited data availability? Does that still require disclosure? What about sovereign bonds? That data is just as inaccessible,” she said in an interview. It would be “helpful” if regulators addressed the confusion surrounding such matters, she said.
But despite an incomplete ruleset, the fallout from questionable ESG accounting may be significant.
“The financial risk may be limited, but companies and asset managers may face significant reputational risk if these claims are subsequently exposed,” analysts at BofA Global Research said in a note to clients. “Longer term, they run the risk of class actions, while the scope of ESG litigation is broadening from climate and environmental issues to use of resources and human rights.”
Read the full article here by Lisa Pham, Advisor Perspectives.
