By Simon Jessop
LONDON (Reuters) - Elon Musk may not like it, but environmental credentials still come second to profit and loss for the world's sustainability-minded investors - even if that means "short-selling" shares to bet on a price drop.
The chief executive of Tesla (NASDAQ:TSLA) Inc tweeted over the weekend in support of Twitter users who said an alleged bet against the electric car company's shares by fellow billionaire Bill Gates was incompatible with saving the planet. The argument is that Tesla's electric vehicles are helping the world wean itself off fossil fuels, which contribute to climate change.
Musk, Tesla and Gates did not immediately respond to a request for comment. On Monday, Musk sealed a deal to buy Twitter Inc (NYSE:TWTR) for $44 billion.
Tesla was for years a big target for short sellers who placed bets against Musk's ability to ramp up electric car production. Those bets soured in the last three years as Tesla's stock rallied more than 1,200%. Its market capitalisation now exceeds $900 billion and demand to short its stock is currently very low, with just 1.1% of its free-floating shares out on loan, data from FIS Astec Analytics shows.
While Musk's antipathy towards short-sellers is long-standing, his argument that investors who care about environmental, social and corporate governance (ESG) should not short a company like Tesla is novel and out of kilter with how many investors approach short-selling.
Data from the Global Sustainable Investment Alliance http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf shows most ESG-minded asset managers invest based on return and risk calculations, and are not necessarily worried about bets against a company viewed as helping tackle climate change if they deem its valuation to be unjustifiably high.
"Even though many of our strategies incorporate ESG, that's not the only thing they're looking at when they evaluate a company. So they may be looking at its valuation or its quality or its momentum or its growth characteristics," said Rob Furdak, chief investment officer for ESG at asset manager Man Group.
"Just because the company's product may have some beneficial characteristics, it doesn't mean it's necessarily a good investment," Furdak added.
Conversely, companies with poor ESG ratings do not appear to be targeted by short sellers more. A Reuters analysis of 228 separate short positions in British companies showed 113 positions were against those with a Refinitiv ESG rating of "B" or above, and 105 against a company with a "C" or below, where "A+" is the highest score and "D-" the lowest.
To be sure, short sellers can help rein in market exuberance, given that flows into ESG funds have soared over the last couple of years. When too much short-selling happens, however, then bargains emerge, said Louise Dudley, a portfolio manager of global equities at Federated Hermes (NYSE:FHI).
"Short positions can lead to short squeezes, which can be potential buying opportunities," said Dudley.