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Breakingviews - Green laggards face a rising tide of short selling

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LONDON (Reuters Breakingviews) - Climate change refuseniks are on borrowed time. BNP Paribas Asset Management on Wednesday launched a fund that will hedge its investments in companies embracing the energy transition by shorting those doing the opposite. It’s a trend that should become more and more prevalent.

Betting that the shares of big fossil-fuel emitters will fall sounds obvious but faces two challenges. One is that the energy transition could take years, and laggards’ stocks may stay elevated for longer than the average fund investor might be prepared to wait. Furthermore, many ordinary investors’ reliance on environmental, social and governance ratings, which lump together many different criteria and are notoriously fuzzy, means that it’s hard to bet solely on green factors. Anticipating that slow-coach Exxon Mobil’s shares will fall and those of a Californian hydrogen fuel cell maker will rise is probably long-term right but could be short-term wrong.

Shorting has even proved controversial. Japan’s $1.5 trillion Government Pension Investment Fund last December said it would stop lending global equities to short sellers because the process lacked what it deemed to be an ESG-friendly long-term perspective. If other big investors were to follow, shorts sellers would find it harder, and more expensive to make wagers.

Still, neither barrier seems insuperable. BNP’s fund, which has a $1 billion capacity, is not relying on ropey ESG ratings, but doing its own research. Rather than comparing apples and pears, it will hedge bets on companies that are serious about cutting emissions with those in the same sector that aren’t.

While this is still a bet that the wider market is beginning to mark climate miscreants down, things are becoming more transparent. BlackRock, which manages $6.5 trillion, is now shoving companies to meaningfully lay out their climate risks using protocols set out by the pan-government Task Force on Climate-related Financial Disclosures. As it becomes more and more obvious which companies are potential stiffs, other investors will be forced to dump their stock, or shrink their exposure to them, pushing up laggards’ cost of capital. Green short selling will increasingly become a no-brainer.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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