Short selling is an effective tool for promoting ESG, says AIMA
06 August 2020 London
Image: janews/Shutterstock.com
The Alternative Investment Management Association (AIMA) and international law firm Simmons & Simmons have worked with alternative investment managers to produce a paper on short selling and responsible investment.
The paper argues that the common misconception of environmental, social and governance (ESG) financing referring to a specific type of long term, buy-and-hold, engagement-heavy equity investing is overly-simplistic and does not utilise all the tools at a fund’s disposal.
Through the paper, the association aims to educate readers on how short selling can be an effective tool and used to create positive ESG-related impacts on the broader markets.
It also describes how hedge funds can use their investment abilities to accomplish an important goal of responsible investment: mitigating undesired ESG risks.
AIMA notes that 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.
The recent collapse of Wirecard is used as an example of this in action.
On of the paper's authors, Darren Fox, a partner at Simmons & Simmons, says: “To dismiss short selling as not having a role to play in the context of ESG would be naïve. One only has to look at the recent events relating to Wirecard to realise that short selling has an important role to play within the ESG framework.
“AIMA has a vital role to play in fostering the debate on this very important issue and the new guide should help to stimulate and move forward that debate.”
Elsewhere, Jack Inglis, CEO of AIMA, says he has no doubt that short selling will soon be seen not just as valuable for responsible investment but “essential”.
The paper proposes that investment managers are able to expose environmental and social failings of issuers, creating more transparent, safer markets for investors and explores responsible investment maturing, and how there will soon be greater demand for strategies that use short selling.
For example, no major ESG data provider accounts for short positions in a systematic manner when calculating ESG scores for a fund. AIMA notes that some data providers simply ignore short positions when doing so.
In order 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. Meanwhile, regulators may consider how short selling can be integrated into the emerging field of responsible investment regulation.
Conclusively, the usefulness of short selling when implementing responsible investment is
being increasingly recognised, the paper argues, adding that, in time, with adequate regulatory support and sound market practice, short selling may be seen not only as a useful tool for responsible investment but an invaluable one.
The paper argues that the common misconception of environmental, social and governance (ESG) financing referring to a specific type of long term, buy-and-hold, engagement-heavy equity investing is overly-simplistic and does not utilise all the tools at a fund’s disposal.
Through the paper, the association aims to educate readers on how short selling can be an effective tool and used to create positive ESG-related impacts on the broader markets.
It also describes how hedge funds can use their investment abilities to accomplish an important goal of responsible investment: mitigating undesired ESG risks.
AIMA notes that 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.
The recent collapse of Wirecard is used as an example of this in action.
On of the paper's authors, Darren Fox, a partner at Simmons & Simmons, says: “To dismiss short selling as not having a role to play in the context of ESG would be naïve. One only has to look at the recent events relating to Wirecard to realise that short selling has an important role to play within the ESG framework.
“AIMA has a vital role to play in fostering the debate on this very important issue and the new guide should help to stimulate and move forward that debate.”
Elsewhere, Jack Inglis, CEO of AIMA, says he has no doubt that short selling will soon be seen not just as valuable for responsible investment but “essential”.
The paper proposes that investment managers are able to expose environmental and social failings of issuers, creating more transparent, safer markets for investors and explores responsible investment maturing, and how there will soon be greater demand for strategies that use short selling.
For example, no major ESG data provider accounts for short positions in a systematic manner when calculating ESG scores for a fund. AIMA notes that some data providers simply ignore short positions when doing so.
In order 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. Meanwhile, regulators may consider how short selling can be integrated into the emerging field of responsible investment regulation.
Conclusively, the usefulness of short selling when implementing responsible investment is
being increasingly recognised, the paper argues, adding that, in time, with adequate regulatory support and sound market practice, short selling may be seen not only as a useful tool for responsible investment but an invaluable one.
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