Short selling is a poor hedge against carbon risk

Investment institutions and asset allocators are under pressure to align their portfolios with net-zero targets. In addition to security selection and the use of carbon allowances and credits, a third way to reach net-zero targets has been gaining attention - short selling carbon intensive stocks.

In a submission document to the Australian Prudential and Regulatory Authority (APRA), hedge fund titan AQR Capital Management outline three reasons why they believe that short selling helps meet net-zero targets. The first is to hedge the risks of any remaining carbon intensive investment exposures in a portfolio, the second is to impact the business operations directly, while the third channel is that “short positions are effectively ‘portfolio carbon offsets’ which can be counted against carbon exposures on the long side”.