Karen Ho, Green Finance Advisor of Friends of the Earth (HK)

The SFC climate risk circular will be effective in Aug 20 and Nov 20 this year. Many of the Hong Kong based Fund Managers are now working on improving their Governance structures, strengthening their investment and risk management process to address Climate related risk, and preparing for required disclosure on metrics and targets, including Portfolio Carbon footprint. Indeed, this change in regulatory policy is aligning with the global trend. Last year, the European Union led the way in trying to rein in the ESG boom by enforcing an anti-greenwashing rulebook: the Sustainable Finance Disclosure Regulation.

While fund managers try to implement such changes and comply with such requirement, hedge funds globally are voicing growing frustration over what they say is an absence of clear regulations for one of their most popular investment strategies – Long Short strategy. Firms including Man Group Plc and BlueBay Asset Management LLP say disclosure rules for environmental, social and governance investing still don’t explain how hedge funds should account for short selling.

Take Portfolio Carbon Footprint calculations as an example, according to SFC:

Portfolio carbon footprint is a representation of carbon emissions normalised by the portfolio’s market value and expressed in tons of carbon dioxide equivalent emissions (CO2e) per million dollars invested. Below is the formula for the calculation of portfolio carbon footprint:

The question is, when you have a Short Position, does it mean that we but shorting a stock which are high emitters, can potentially “off-set” all the emissions from the Long Positions?
There seems to be a debate globally on how we should treat those Short Selling strategies. Reporting on the ESG impact of short positions within portfolios can be challenging for hedge fund managers. They invest in a range of asset classes and financial instruments that are not always extensively covered by ESG data providers, and there is no industry standard for reporting the ESG impact of portfolios that combine long and short positions, according to UN PRI. The hedge fund industry and data vendors need to be innovative in their approach to measuring and reporting portfolio ESG exposures and impact, such as carbon footprints or net-zero targets.
Some managers argue that short selling — whereby an investor makes money if an asset such as an oil producer falls in value — should be booked as negative CO2 emissions. Others say an oil company doesn’t suddenly emit less CO2 just because it’s being targeted by short sellers. As for the regulators, they aren’t providing much help to resolve the debate.
Read more at: https://www.bloombergquint.com/markets/hedge-funds-split-over-short-sellers-impact-on-emissions-debate