October 29, 2003
SRI Short Selling: an Oxymoron, or Mutually Reinforcing Strategies?
by William Baue
Socially responsible investing strategies rarely include short selling, though this tactic may in
fact eclipse other SRI strategies in its ability to effect change.
Short selling is an investment technique that enables investors to profit from the decline of a
stock price. It involves borrowing shares of a stock and selling them to a new buyer, then later
buying back the shares at a lower price at a profit when the price has lowered and returning the
shares to the original owner. While typical mutual funds do not short sell, hedge funds use short
selling as one of several aggressive investment techniques.
Short selling may sound
ethically dubious and even antithetical to socially responsible investing (SRI). However, many
social investors realize that shorting can be quite effective in nudging companies to improve their
social and environmental performance.
“Short selling is not inconsistent with
social investing,” said Steve Schueth, president and chief marketing officer of the First
Affirmative Financial Network (FAFN), a consortium of SRI investment advisers.
Shorting does, however, preclude the use of some other SRI tools.
advocacy strategies obviously don’t work with short selling: if you don’t own the
stock, you can’t file shareholder resolutions or vote proxies,” Mr. Schueth told
While shorting obviates conducting dialogue with management, it does send
a clear message to companies.
“The last call a company wants to receive is one
telling them you’re shorting their stock,” said Jane Siebels-Kilnes, founder and CEO of
Bahamas-based Green Cay Asset
Green Cay offers four SRI hedge funds: a $30 million emerging markets fund
established in 1997, a $138 million global technology fund created in 1999, a $45 million US equity
relative value fund started in 2001, and a global hard asset equity fund launched earlier this
month. Green Cay divides its portfolios in half, devoting one side to traditional long-term SRI
techniques and the other side to shorting, thus capitalizing on both ups and downs. On both sides,
Green Cay analyzes financials first, identifying “cheap” stocks on the long side and
stocks with downward momentum on the short side.
“On the short side, we narrow the
field down to 50 stocks we would short, and send them to our ethics professors and SRI consultants
to rank them according to bad values, and we short accordingly, working our way down the
list,” Ms. Siebels-Kilnes told SocialFunds.com.
Green Cay’s definition of bad
values includes environmental mismanagement and employee mistreatment.
“We call the
companies with bad values and tell them we’re shorting them and why,” she added.
Some believe this communication speaks louder than the SRI practices of shareowner dialogue or
negative screening, which excludes companies from investment.
“Frankly, I found
negative screening to be ineffective,” said Ms. Siebels-Kilnes, who does employ basic SRI
screens that exclude tobacco, alcohol, gambling, and handgun manufacturing. “When a little
firm like Green Cay tells a company we’re not going to invest in them, they say, ‘So
“With shorting, we do make a difference, we do get reactions, we
have had companies change,” Ms. Siebels-Kilnes told SocialFunds.com.
example, the instance of Vestel, a television and computer monitor manufacturer based in Turkey.
Originally, Green Cay planned on taking a long position, but the customary site visit to companies
being considered for investment revealed poor environmental stewardship and dangerous working
“Instead of going long, we shorted the stock, and told management we
were doing so, and they actually changed practices: they put in new filters in their workplaces,
cutting down employee sick days by half, and they also changed their emissions so they are better
than the industry average,” explained Ms. Siebels-Kilnes. “The stock fell, and now
we’re long in Vestel.”
Green Cay’s combination of short and long
strategies advances another argument in favor of the business case for SRI, which holds that
socially and environmentally responsible companies tend to outperform their peers.
“We believe that return and SRI go hand-in-hand: by doing long-term investment on one
side of the portfolio and shorting based on bad-values ranking on the other side, we really combine
return with SRI values, so you’re not giving up return by doing this,” said Ms.
Siebels-Kilnes. “In fact, shorting the bad values companies really enhances your