Investment Operations

Short Selling is an Essential Tool for Responsible Investment

Artificial Intelligence

The Alternative Investment Management Association (AIMA) and international law firm Simmons & Simmons have worked with some of the world’s leading alternative investment managers to examine how short selling can be used in the context of responsible investment.

The paper describes how hedge fund firms can use their unique investment abilities to accomplish an important goal of responsible investment: protecting against undesired key risks such as climate risk. The example of ‘carbon footprinting’ is used. By properly accounting for the carbon exposure of both their long and their short portfolios, the study concludes, alternative investment managers and their investors can gain crucial insights into how exposed their investments are to climate change and the attendant policy changes. Short selling can thus be used to accomplish a crucial goal of responsible investment: protecting investors from ESG risks.

“Alternative investment managers have always been at the forefront of investment innovation,” said AIMA CEO Jack Inglis. “Today, they are using one of their defining abilities—short-selling—to protect their investors from novel risks, and to make markets as a whole safer. We are happy to see this fact gain increasing recognition from investors and leading organizations such as the PRI, and we have no doubt that short selling will soon be seen not just as valuable for responsible investment, but essential,” Inglis said.

Short selling can also be used to create positive impacts for the broader markets. Short selling campaigns are often triggered by ESG concerns such as questionable issuer governance, poor employee safety practices, environmental issues and even alleged human rights abuses. Alternative investment managers have a long and successful track record of discovering governance failures, as witnessed by the recent Wirecard scandal. They use this same expertise to expose environmental and social failings of issuers, creating more transparent, safer markets for investors around the world.

“To dismiss short selling as not having a role to play in the context of ESG would be naïve,” said Darren Fox, Partner, Simmons & Simmons. “One only has to look at the recent events relating to Wirecard to realize that short selling has an important role to play within the ESG framework,” Fox added.