What is green shorting?

Shorting or short selling is a trading strategy employed by investors on the stock market. Green shorting targets specific companies or stocks with reference to their environmental credentials.

What is shorting? 

The aim of short selling is to profit on a stock when the price decreases, according to online broker Commsec. To do this an investor “borrows” shares with the intention of buying it back in the future. The hope is that the shares lose value between the time they’re sold and repurchased, earning the short seller any profits.

In contrast, a long position represents the more traditional buy-and-hold investing approach in which shares are bought and held in the hope that they will increase in value.

However, as is the case with most share trades, short positions are purely speculative. This means that there’s no guarantee that the security you short is going to reduce in value. Therefore, it may be a risky strategy to employ.

Additionally, there are often brokerage fees and other charges associated with short selling. To open a short position, a trader may be required to have a margin loan and will usually need to pay interest on the value of the borrowed shares while the position remains open.

What is green shorting and how is it different?

Green shorting is a form of short selling that specifically targets a company or stock based on its climate-related policies, reputation or outlook.

Investors may purposefully short shares of a carbon-intensive company or group of companies with the expectation that, as a result of their poorly perceived climate practices, the value of the company will decline.

Green shorting may also be undertaken in an effort to place pressure on these entities to improve their environmental practices.

Not-for-profit collective WorkforClimate suggests that “responsible” investing isn’t an ultramodern concept and has long been utilised as a tool for investors seeking to support organisations and companies that are climate-aware.

“Green shorting goes one step further. It’s an escalation plan where investors deliberately ‘short’ the stock of heavy emitters, betting on their demise, profiting from their downfall, and hedging their risk at the same time. Great for potential investors, not so good for carbon emitters,” James Shackell explained in a post on WorkforClimate’s website.

Green shorting can give short sellers power over carbon-intensive companies as voting shareholders. This is often accomplished through hedge funds or groups of influential traders that can short a significant amount of stock.

How does green shorting work?

Let’s say a carbon-intensive company’s shares are trading for $100. A short-seller may initiate a three-month short position with 100 shares. They will borrow these 100 shares, perhaps using a margin loan, and sell them immediately at their market price of $100 each, retaining $10,000. 

Three months later, the company’s share value has dipped and are now trading for $50 each. The short-seller repurchases the initial 100 shares for a total $5,000 and returns them to the original owner, profiting $5,000.

However, the broker who manages the trades typically charges fees for these transactions and if you took out a margin loan, you’d likely incur additional fees and interest charges. In addition, there is no guarantee that the shares you purchase will decrease in value during the length of time you stipulate in your trading position.

Short-selling is generally not available to retail investors. It is typically reserved for institutional investors, such as hedge fund managers.

What is a green investment?

Stocks, exchange-traded funds (ETFs), mutual funds and more may be considered green investments if their underlying businesses are, in some way, involved in operations aimed at bettering the environment.

Presently, the definition is broad enough that companies offering ‘green investments’ can range from fully sustainable enterprises and those developing alternative energy technologies to businesses simply employing a few environmentally-conscious work practices.

To avoid the noise and pretenders that are hoping to piggyback the latest trends and progressive concepts, you’ll have to dig deeper than a few upbeat press releases claiming an environmentally-friendly business agenda. Do your research to uncover a business’ prospectus, policies and performance as it pertains to sustainability.

To help you decide whether or not to invest in the stock market, we’ll offer five pros and five cons of buying shares.