Key points
- Green shorting might soon hit the mainstream, but market watchers are scratching their heads in wonder of what it means
- The method can be a branch of both ESG investing and shorting. It sees short sellers target a company based on its environmental credentials
- Today, an Australian investment management firm launched a fund featuring green shorting, and these ASX 200 shares have made its books
This ESG investment style is becoming increasingly mainstream and some S&P/ASX 200 Index (ASX: XJO) shares are being targeted.
Green shorting is a method of short selling shares based on environmental credentials. It can be argued to help push for climate action and hedge against risks. And one fund manager believes the ASX is one of the best places on earth to engage in green shorting.
Here are the ASX 200 shares that are reportedly being targeted by green shorters.
But first, what is green shorting?
Green shorting is a form of short selling. Short selling is a method whereby a 'short seller' will borrow shares from another investor.
The short seller will then sell the borrowed shares on market and buy them back prior to returning them.
They will pocket any fall in value the borrowed stock might experience in the meantime as profit.
Green shorting is when an investor shorts a company based – mainly – on their climate credentials.
As AQR's Cliff Asness explains, shorting companies because of their climate policies can put pressure on them to 'clean up' their emissions.
It could also be seen to help protect short sellers from some climate-related risks.
Finally, green shorting can give short sellers power over carbon intensive companies as voting shareholders.
Which ASX 200 shares are being green shorted?
Plato Investment Management announced the launch of its Global Net Zero Hedge Fund this afternoon. The fund is designed to outperform broader markets while being exposed only to net zero investments.
It also engages in green shorting.
Plato's managing director Don Hamson and portfolio manager David Allen told The Age and the Sydney Morning Herald the newly unyielded fund is taking part in green shorting. It's short selling shares in ASX 200 companies with net zero action plans that it thinks might prove difficult to pull off.
The publications quoted Hamson as saying:
We short stocks that are higher carbon with poor return outlook and long-stocks with low carbon on average with good return averages.
Meanwhile, Allen told the publications that the ASX, with its many carbon-intensive sectors, could be a beacon for green shorting:
The ASX is unfortunately one of the worst developed markets in the world. It's not quite as bad as emerging markets, but that's perhaps to be expected.
The fundies said the ASX 200 companies being green shorted include AGL Energy Limited (ASX: AGL) and Qantas Airways Limited (ASX: QAN).
The fund reportedly believes AGL's reliance on coal-fired power and Qantas' plan to decarbonise using not-yet-existent technologies will see them struggling to reach net-zero.
At Qantas' 2021 annual general meeting, its chair Richard Goyder stated that the airline planned to reach net zero by 2050 using methods including biofuels, offsetting emissions, and embracing low-emissions technology.
AGL has previously stated its net zero by 2050 strategy will encompass offering customers carbon neutral energy, investing in low emissions energy, and transitioning its portfolio. It will also be helped along by its planned demerger.
