Short selling has a role in the road to net zero

4 minute read

We discuss why short selling of the right kind has positive climate impact, both when executed in fixed income as well as in equities. This note first appeared in Environmental Finance and is reprinted with permission.

In this report, we argue against the idea proposed in a recent ISS ESG article that covers the impact of short-selling with the conclusion that shorting is not making a difference: "[...] by going short on Volkswagen you are not removing cars from the road!". There are several reasons why we disagree with this sentiment.

First, a short seller of Volkswagen bonds effectively shifts the supply of capital to the company to the left. Less supply of capital, ceteris paribus, leads to a higher yield required for supply and demand to equilibrate. Effectively this means a higher cost-of-capital for the issuer, in turn leading to a higher cost base and lower margins for Volkswagen. And Volkswagen will produce fewer cars to put on the road if their margins on doing so are lower. Second, let us also dispute the notion that short selling in any shape or form is a shortcut as the article claims.

Short selling is one of the hardest exercises in finance. To summarise, we believe there are very strong quantitative/financial as well as engagement arguments as to why short selling can and should be credited in terms of carbon accounting and real climate impact.