The question of whether short selling is compatible with the spirit of responsible investing is a topic that has come under scrutiny in recent years. This article examines the different concepts used today to operationalise carbon footprinting, including the idea of netting as a tool to achieve net-zero emissions, as well as the impact that buying and selling short positions might have on the cost of capital.
Overview
We have leveraged our experience working with alternative asset managers on topics such as climate change regulation and strategy implementation in order to clarify questions related to transparency in carbon reporting and how this might be affected by potential inconsistencies in relation to “netted” disclosures. So far, limited guidance on this topic from the regulators has raised many questions with regards to disclosures and a proper evaluation of risk exposure.
From an investment standpoint, it is widely recognised that climate risk can create financial risks, stemming from physical impacts (ie floods, storms, droughts and fires) as well as the real economies needed to transition to a more sustainable use of resources. At the same time, there are numerous investment opportunities that can also be identified.
Increasing regulatory demands and growing investor pressure to manage climate risk are forcing asset managers to act. Asset managers, banks and insurance companies are being required not only to identify climate-related risks in their operations but also in their investment portfolios. Doing so transparently and in a consistent manner will hopefully help achieve the overarching goal of greenhouse gas (GHG) reduction in line with the Paris Agreement.
Why GHG accounting and reporting important?
GHG accounting is the process of measuring the amount of GHG emissions produced by a company and involves the assessment of the total direct and indirect GHG emissions arising from a business’ activities. To date, scope 1, scope 2 and scope 3 GHG emissions have been the most common metrics used by the finance industry, NGOs and international organisations to assess global efforts to transition to a low-carbon economy. And we except these metrics to continue to be a key tool for companies and