As investors concerned about climate change, we were disappointed to read the piece “Short selling does not count as a carbon offset” (Markets Insight, February 18), which unhelpfully conflates the two very different practices of carbon accounting and carbon offsetting.
Although we have advocated for a thoughtful carbon accounting methodology, we have never suggested that short selling is equivalent to reducing carbon in the atmosphere, nor has anyone else to our knowledge.
While it is true that shorting a stock doesn’t remove carbon from the atmosphere, buying a carbon emitting stock on an exchange doesn’t add carbon to the atmosphere either. Buying and selling stock, whether long or short, is just a financial transaction. Carbon dioxide gets into the atmosphere through smokestacks and tailpipes; and the only way to reduce existing carbon is by purchasing high quality, durable carbon removal.
Carbon accounting methods must be mathematically sound and internally consistent. We hope that much is uncontroversial. They should also incentivise investors and companies alike to make decarbonisation a priority. Efforts to exclude counting shorts as part of an investment portfolio’s “carbon footprint” will have the perverse effect of discouraging investment in hedge funds that can potentially bring these funds’ influence to bear.
Hedge funds have degrees of freedom — including the use of leverage, short selling and derivatives — that are unavailable to other investment strategies. These degrees of freedom can allow them to be agents of decarbonisation above and beyond what can be accomplished through traditional investment means.
There is a concern that counting shorts against long positions will let hedge funds “off the hook” for having to decarbonise. If you believe that a long-only fund selling its shares increases the cost of capital of a company, then selling the same number of shares short should raise the cost of capital an equivalent amount. In the end, the most important metric is actual influence — and that is the metric where hedge funds have the potential (if wielded) to excel.
Richard Slocum
Chief Investment Officer
Michael Cappucci
Managing Director, Sustainable Investing
Harvard Management Company
Boston, MA, US
Letter: Short selling hedge funds can be agents of decarbonisation
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