Climate-conscious investors tend to buy green stocks or build big stakes in less-responsible companies and aim to persuade them to change. They should also be short sellers, according to quant pioneer Cliff Asness.
Betting against stocks with high carbon emissions is vital for expressing an investor’s views, hedging against climate-change risks and actually affecting corporate policies, the co-founder of systematic powerhouse AQR Capital Management wrote in a Tuesday blog post.
The booming universe of sustainable funds typically puts money in shares with higher environmental, social and governance ratings and shuns those with bad grades. Actually shorting the latter is far less common — partly because it’s unclear how such positions should be counted in a product’s ESG score.
It’s a topic of “tremendous confusion,” according to Asness.
“The proper treatment of shorting matters for the ultimate goal of responsible investing: to effect change,” he wrote. “Shorting has impact by dissuading companies from pursuing whatever is objectionable to the short community in aggregate; in this case, carbon emissions.”
How to incorporate bearish bets into ESG metrics may seem an esoteric point. But while research into the influence of short selling is patchy, studies generally suggest it can have a positive disciplinary effect and an impact on operating performance and corporate social responsibility.
According to Asness, shorting is also necessary for building portfolios with net zero carbon emissions since it’s nearly impossible to achieve that with just long positions. They should be used like carbon offsets to help cancel out any carbon exposure, he said.
Greenwich, Connecticut-based AQR had attracted about $1.5 billion to its net-zero funds as of the end of June, Asness wrote.
This isn’t the first time the godfather of quant investing has weighed in on the asset-management industry’s hottest bandwagon. In 2017, he went against the usual ESG sales pitch by arguing that by definition excluding bad stocks must lead to inferior performance.
By staying away from a polluter, the sustainable investor succeeds in raising its cost of capital, the flip side of which is higher returns for the less-conscientious fund that buys the stock, he said.
To contact the author of this story:
Justina Lee in London at email@example.com
© 2021 Bloomberg L.P.