Highlights

• Green shorting is a form of short selling where an investor shorts a company, primarily on its climate credentials.
• This way pressure can be exerted on heavy carbon emitters for decarbonising their operations.
• In the past few years, several ASX-listed firms have shared their strategies to reach net-zero by 2050.

Ever heard about green shorting? If not, then continue reading as the concept is expected to hit the mainstream very soon. And those who are well versed with green shorting should read further about its potency in exerting pressure on carbon-intensive companies so that they clean up their emissions. Well, green shorting is a form of short selling where an investor shorts a company, primarily on its climate credentials.

Let’s simplify it further for the readers by first explaining short selling.

Short selling is an investment or trading strategy using which, an investor borrows a security and sells it in the market, planning to buy it back later at a lower price to make a profit from the difference. Short sellers take their positions on speculations of a drop in the share price.

So, green shorting is done the same way, but short sellers target a company based on its environmental credentials. Investors may deliberately short stocks of the carbon-intensive companies whose climate policies put pressure on the environment. Carbon-intensive products include steel, concrete, natural gas, petroleum and coal.

This way pressure can be exerted on heavy carbon emitters to decarbonise their operations.

Investors target the stocks with higher carbon and muted return outlook. They generally long-stocks which are low on carbon on average and enjoy good return averages. Green shorting is being seen as a help to push for climate action and hedge against climate risks.

In the past few years, several ASX-listed firms have shared their strategies to reach net-zero by 2050. Net-zero implies a significant decline in the use of coal, oil, and gas. For instance, in 2019, Qantas Group announced that it was only the second airline in the world to commit to a net-zero emissions target by 2050. In his address at the 2021 annual general meeting (AGM), Qantas Group CEO Alan Joyce focussed on the below given four pillars that supported the company’s net-zero target:

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Similarly, in its FY21 annual report, AGL Energy Ltd said: “By 2050, we believe that Australia has the opportunity to be carbon neutral and an energy superpower. We will play our part in achieving this. We acknowledge the need to reduce scope 3 emissions, we will deliver a detailed climate change roadmap, including specific decarbonisation targets showing clear progress relative to our existing emissions reduction trajectory.

“As Australia’s largest energy retailer, we recognise that the pace of energy transition is accelerating, and we are well positioned to support this acceleration. We will list as carbon neutral for scope 1 and 2 emissions, with a clear pathway to carbon neutrality for all sources of electricity,” the report also said.

Some ambitious targets have been introduced by Australia’s super funds and banks in the recent past to achieve net-zero emissions exposures in their portfolios and loan books by 2050. The goals are being met by super funds by selling stocks of carbon-intensive companies. A few banks have also limited their lending to such companies.

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APRA’s draft guidance

In 2021, the Australian Prudential Regulation Authority (APRA) released a consultation draft guidance to banks, insurers, and superannuation trustees with regard to the management of financial risks due to climate change.

In April last year, leading US hedge fund AQR Capital Management told APRA that it expected global investors to increasingly short sell shares in companies with high emissions so as to lower risks in their investment portfolios. It triggered concerns for the  resources-heavy ASX, which could be susceptible due to a shift in investor sentiment amid concerns around climate change.

AQR also said that its clients would need to move beyond simply divesting shares in companies that are carbon intensive and consider actively shorting them to meet net-zero emissions targets in their portfolios.

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