Shorting “Bad Actors”
- What is short selling?
- The emergence of short selling as an impact investing strategy
- The ethical implications of short selling
Short Selling, a Risky Strategy
The recent volatility of a handful of stocks, including GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC), has drawn increased national attention to the practice of short selling. Short selling is a high risk investment strategy to bet against a stock. To short a stock, investors borrow shares which they believe are overpriced through brokers and immediately sell them. At a later date, the investors buy back those shares for a lower price, return them with interest, and pocket the difference from the initial sale of the shares. If the stock increases in value, however, investors can lose significantly more than their initial investment since there is no limit on how much the value of a stock can increase.
The Rise of Short Selling in Impact Investing
Short selling is now being adopted by impact investors as a tool to maximize returns and impact. Impact investing seeks to produce both financial gains as well as positive social and environmental effects. Typically, to achieve this goal, investors direct capital towards companies with positive impacts like the use of renewable energy in production. Another key aspect of impact investing is the practice of avoiding companies with negative impacts like pollution or the mistreatment of workers. Short selling takes this approach one step further by allowing investors to directly take a position against companies with negative environmental or social impact. In this way, impact investors can encourage socially and environmentally responsible corporate behavior, and discourage irresponsible behavior in companies that they don’t actually own. Shorting companies with negative impacts also has the potential to increase the returns on impact investing portfolios and funds. A driving belief behind impact investing is that companies which fail to address their environmental and social impact are unsustainable in the long run. Therefore, taking a position by shorting a stock could further capitalize on that theory.
The Ethics of Short Selling
Short selling, while legal, often has negative connotations. Not only does the practice involve profiting from the financial misfortune of others, but it has also been denounced, by some, as a driver of economic downturn and the collapse of companies. When investors short a stock, they directly drive down the price and encourage other investors to sell their shares. If shorting drives down prices enough, it could lead to layoffs and even put a company out of business. These ramifications put short selling at odds with many principles of socially responsible investing and could turn impact investors away from the practice. Proponents of short selling argue that it helps calibrate the price of the stock with the company’s intrinsic value. Furthermore, when applied to impact investing, short selling could accelerate the transition away from irresponsible business practices. By rapidly driving companies with bad track records to failure, shorting has a far greater capacity to garner the attention of those companies and compel them to change their ways. Ultimately, it remains unclear whether these potential benefits of short selling are enough for impact investors to overlook its moral ambiguity and adopt the practice more widely. However, the strategy does highlight the sense of urgency which many investors feel to address society’s most pressing problems. We must continue this innovation in the field of impact investing to yield maximum societal benefit and financial returns.
Sources:
The Business Ethics of Short Selling and Naked Short Selling
Impact Investing Success Story: Short Selling Private Prison Stock