Last updated: 06:27 / Thursday, 17 September 2020
Research by AIMA and Simmons & Simmons

Short Selling: An Essential Tool for Responsible Investment

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Short Selling: An Essential Tool for Responsible Investment
  • Hedge fund firms can use their investment abilities to accomplish an important goal of responsible investment: protecting against climate risk
  • By properly accounting for the carbon exposure of both long and short portfolios, you can gain crucial insights into how exposed your investments are to climate change
  • Short selling can create positive impacts for the broader markets: alternative investment managers have a long track record of discovering governance failures

The Alternative Investment Management Association (AIMA) and international law firm Simmons & Simmons have recently published a paper that examines how short selling can be used in the context of responsible investment. To do so, they have worked with some of the world’s leading alternative investment managers, revealed AIMA in a press release.

The research document describes how hedge fund firms can use their investment abilities to accomplish an important goal of responsible investment: protecting against undesired key risks such as climate risk. “Carbon footprinting” is one of the examples they used.

“By properly accounting for the carbon exposure of both their long and their short portfolios, alternative investment managers and their investors can gain crucial insights into how exposed their investments are to climate change and the attendant policy changes”, AIMA said. Short selling can thus be used to accomplish a key goal of responsible investment: protecting investors from ESG risks.

In their view, 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.

In that sense, AIMA CEO Jack Inglis commented that alternative investment managers have always been at the forefront of investment innovation. 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 organisations 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”, he added.

Meanwhile, Darren Fox, Partner in Simmons & Simmons claimed to be “delighted” to have been able to assist AIMA in producing the Guide. “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”, he stated.

Fox pointed out that 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.

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