In his latest insight titled – Shorting Your Way To A Greener Tomorrow, Cliff Asness examines the use of shorting in an ESG context. Here’s an excerpt from the insight:
My colleagues (and even I) have written extensively on responsible investment, as in the use of ESG factors in investment decisions. In this piece I aim to examine one issue that generates tremendous confusion: the use of shorting in an ESG context. When it comes to calculating a portfolio’s ESG score, we have heard arguments ranging from “ignore the shorts” to “net them against longs,” and, my favorite as it’s creatively insane, “pretend the shorts are actually longs.” To say there is confusion would be an understatement.
You may wonder why AQR thinks this question is important. Well, the proper treatment of shorting matters for the ultimate goal of responsible investing: to effect change. Also we care because it matters to our clients, who often have ESG needs and preferences and may opt to invest in a Sustainable version of our strategies (approximately 80% of our AUM use some form of ESG signals, and 20% of our AUM is directly in Sustainable-labeled strategies). Our industry is currently in the process of grappling with foundational questions of what ESG means in a portfolio context and short selling is an important tool in this endeavor.
You can read the entire insight here:
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