• AIMA report discussed whether short selling is compatible with responsible investment.
• Uses the example of environmental risk to demonstrate the link between the concepts.
• Presents simplified, theoretical discussion of how environmental risks could be hedged.
• Uses carbon footprinting, to show how short sales could be used to limit risk exposure.
• Outlines how short selling can have a positive effect on the wider markets, by raising awareness of the carbon risks and encouraging issuers to limit their carbon emissions.

Conclusions

• With adequate regulatory support / sound market practice, short selling may be seen as an invaluable tool for responsible investment; and the two concepts are compatible.
• Short sales can be an effective tool to accomplish two goals of responsible investment, both by mitigating undesired risks from ESG, and by creating positive market impact.
• By selling short carbon-intensive issuers, manager can mitigate carbon risks in a fund, and help positive impact by raising the cost of capital for the issuers being sold short.
• Short selling provides a way which managers can be rewarded for uncovering carbon and other ESG risks, which may be inappropriately priced in the market.

Points to Consider

• To properly reflect their investment activities, give investors clearer picture, managers may wish to calculate and report ESG attributes of long / short portfolios separately.
• As responsible investment matures, there may be more demand for strategies that use short selling; data providers and regulators may wish to adjust products accordingly.
• To provide a more accurate picture, data providers may wish to consider calculating and reporting the ESG scores of a manager’s long and short positions separately.
• Regulators may consider how short selling can be integrated into regulation, ability to report impact of short positions would ease implementation of responsible investment.