Oil well with the pump jack in action. Alberta

Short selling is one way investors can meet their ESG goals, the Managed Funds Association (MFA) argues in a new paper.

For example, short selling activity can be used to increase the cost of capital for public companies that are heavy emissions producers — incentivizing management to undertake more sustainable strategies, the industry trade group for the alternative asset management industry said.

Additionally, the paper detailed how short selling can serve as a tool to hedge against the portfolio risks associated with the transition to a low-carbon economy.

“Short selling has the potential to help reallocate US$50 billion-US$140 billion of capital away from the most heavily polluting companies,” the paper said.

“The alternative asset management industry can play an important role in helping achieve ESG goals,” said Bryan Corbett, president and CEO of the MFA, in a release.

“Short selling is an essential component of healthy functioning capital markets, promoting price discovery and uncovering corporate fraud. Our report provides quantitative evidence that short selling can be an important tool to incentivize corporations to take ESG into consideration,” he added.

The report argued that for short selling to maximize its potential as an ESG driver, short selling should be accounted for differently than long positions in ESG portfolio metrics.