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Removing informed sellers reduces the asymmetry of Empirical evidence from the three categories tends to To summarize, a body of academic evidence indicates institutional flows move around environmental
information and narrows bid-ask spreads. agree with this theory: that short sellers are informed in that they anticipate characteristics, specifically operational carbon intensity,
price declines, however, they are not responsible for and the long-term implications of such patterns of
At the same time, the market mechanism is disrupted, i. Cross-county variation: An analysis of forty-six driving asset prices down. flow²⁴. This seminal work on decarbonization factors
and revelation of information is slower, which could equity markets reveals that countries that permit and investor behavior revealed that active institutional
widen spreads. short selling, incorporate information into prices investor flows contain information about anticipated
quicker. Additionally, short sales restrictions don’t What does this mean for investors? climate related fundamentals and returns. To put it
Empirical findings from all three types of academic reduce negative skewness of returns at the stock simply, for those seeking alpha opportunities, tilting
studies tend to agree that short selling constraints level¹⁷. While it is often claimed that the short-term horizon towards low carbon strategies experiencing positive
reduce liquidity at the single-stock and broader of borrowers is at odds with long-term objectives, contemporaneous flows improves returns. In addition,
market level: ii. Natural Studies: Price discovery was slower for existing literature suggests this is not the case and we observed a low correlation between strategies
stocks impacted by the short-selling bans during instead, reveals short selling to be an important in the US and Europe. This is was particularly salient
i. Cross-county variation: A study of 111 countries the 2008 financial crisis, especially where negative market mechanism. Moreover, evidence indicates that after 2016, when almost all US decarbonization factors
found that in countries where short selling is more news was concerned¹⁵. short sellers’ presence in a market increases liquidity. experienced outflows after the change in presidential
feasible, turnover, a proxy for liquidity, was 15% Increased liquidity means reduced transaction costs on administration, an effect not seen in Europe.
higher. That is, there is increased liquidity of market iii. Time-series: Prices of stocks with short-selling average, while price discovery helps investors get more
indices when short selling is possible¹². constraints (such as low lending supply) are less accurate prices and potentially prevents disruptive price There is regional specificity seen in investor behavior
informative. Evidence also suggests increased bubbles. Basic financial theory suggests, and empirical as well as regulation. For environmental metrics, such
ii. Natural studies: Financial stocks subject to shorting “shorting flow reduces post-earnings-announcement evidence supports the idea that short selling, facilitated as carbon emissions, companies are increasingly paying
bans during the 2008 financial crisis resulted in drift for negative earnings surprises¹⁸¹⁹²⁰.” by securities lending, improves market efficiency and the price through the 58 sovereign and sub-sovereign
spreads that were 2-3x wider while controlling for allows for the proper allocation of capital²³. pricing schemes globally²⁵.
previous behavior¹³¹⁴¹⁵.
Is short selling detrimental to long-term value? With that said, this view only looks at short selling from Additionally, the EU Commission has set legislation
iii. Time-series: Suggest that short sellers can be a purely economic perspective but does not necessarily around the Task Force for Climate Related Financial
liquidity suppliers when spreads are especially wide, The studies cited above provide empirical evidence that speak to the interplay between short selling and ESG Disclosure (TCFD), Japan’s stewardship code
providing a stabilizing force in the stock market¹⁶. short selling is important for efficient capital markets characteristics of securities. recommends company engagement to promote
and when viewed holistically, suggest that short selling sustainable growth and, France’s Energy Transition Law
Price discovery: The theoretical impact of short selling is not detrimental to long-term value. (Article 173) requires institutional investors to disclose
on the speed of price discovery is clearer than it is The growing presence of ESG in investing information on their ESG integration and how strategies
for liquidity. Additionally, there are several specific studies that found align with an energy and ecological transition²⁶.
no statistical difference in excess returns of stocks for To understand the intersection of ESG and securities
Short-selling constraints restrict traders with negative which short sales were banned and those stocks in lending, we pull insights from empirical studies on Companies are disclosing more ESG metrics to be listed
information from expressing their sentiment, slowing which short selling was permitted²¹²²¹⁵. investor behavior in climate finance and ESG investment on any of the 94 sustainable stock exchanges requiring
the speed with which bad news is incorporated into management of listed equities. some level of ESG disclosure, a number that significantly
market prices. increased over the last ten years²⁷.
In our 2019 paper, Decarbonization Factors, a
¹⁷Bris, A., Goetzmann, W. N. and Zhu, N. (2007). Efficiency and the Bear:
¹²Daouk and Charoenrook (2009). A Study of Market-Wide Short-Selling Short Sales and Markets Around the World. The Journal of Finance. collaboration with Harvard Business School professor,
Restrictions. Working paper, Cornell University. ¹⁸Saffi, P. A. and Sigurdsson, K. (2010). Price Efficiency and Short Selling. George Serafeim, we shed light on how active
¹³Boehmer, E., Jones, C. M. and Zhang, X. (2013). Shackling Short Sellers: ¹⁹The Review of Financial Studies. ²⁴Cheema-Fox, A., LaPerla, B.R., Serafeim, G., Turkington, D. and Wang, H.
The 2008 Shorting Ban. The Review of Financial Studies. ²⁰Reed, A. (2007). Costly Short-selling and Stock Price Adjustment to (2019). Decarbonization Factors. Working Paper on SSRN.
¹⁴Marsh, I. and Payne, R. (2012). Banning Short Sales and Market Quality: Earnings Announcements, Working paper, University of North Carolina. ²³The CAPM theory underpins modern portfolio theory and provides a ²⁵World Bank Carbon Pricing Dashboard. (accessed February 10, 2020).
The UK’s Experience. Journal of Banking & Finance. ²¹Battalio, R., Mehran, H., and Schultz, P. (2011). “Market Declines: Is basis for allocating portfolios between risky and risk-free assets. Two UNPRI.org.
¹⁵Beber, A., Pagano, M. (2013). Short-Selling Bans Around the World: Banning Short Selling the Solution?”. Federal Reserve Bank of New York CAPM assumptions are: that short positions are allowed and there are no ²⁶Responsible Investment Regulation Map (as of September 9, 2019).
Evidence from the 2007–09 Crisis. Journal of Finance. Staff Reports transaction costs. The foundation of CAPM was published in the following UNPRI.org
¹⁶Comerton-Forde, C., Jones, C. M. and Putniņš, T. J. (2016). Shorting at ²²Beber, A., Fabbri, D., Pagano, M., Simonelli, S. (2018). “Short-selling bans papers: William Sharpe. (1964). Capital Asset Prices: A Theory of Market ²⁷Sustainable Stock Exchanges Initiative website (February 10, 2020).
Close Range: A Tale of Two Types. Journal of Financial Economics. and bank stability”. Working paper: European Systemic Risk Board. Equilibrium. Journal of Finance. SSEInitiative.org. SSEI partners with the UNPRI.

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