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October 29, 2003

SRI Short Selling: an Oxymoron, or Mutually Reinforcing Strategies?
    by William Baue

Socially responsible investing strategies rarely include short selling, though this tactic may in fact eclipse other SRI strategies in its ability to effect change.

SocialFunds.com -- Short selling is an investment technique that enables investors to profit from the decline of a stock price. It involves borrowing shares of a stock and selling them to a new buyer, then later buying back the shares at a lower price at a profit when the price has lowered and returning the shares to the original owner. While typical mutual funds do not short sell, hedge funds use short selling as one of several aggressive investment techniques.

Short selling may sound ethically dubious and even antithetical to socially responsible investing (SRI). However, many social investors realize that shorting can be quite effective in nudging companies to improve their social and environmental performance.

“Short selling is not inconsistent with social investing,” said Steve Schueth, president and chief marketing officer of the First Affirmative Financial Network (FAFN), a consortium of SRI investment advisers.

Shorting does, however, preclude the use of some other SRI tools.

“Shareholder advocacy strategies obviously don’t work with short selling: if you don’t own the stock, you can’t file shareholder resolutions or vote proxies,” Mr. Schueth told SocialFunds.com.

While shorting obviates conducting dialogue with management, it does send a clear message to companies.

“The last call a company wants to receive is one telling them you’re shorting their stock,” said Jane Siebels-Kilnes, founder and CEO of Bahamas-based Green Cay Asset Management.

Green Cay offers four SRI hedge funds: a $30 million emerging markets fund established in 1997, a $138 million global technology fund created in 1999, a $45 million US equity relative value fund started in 2001, and a global hard asset equity fund launched earlier this month. Green Cay divides its portfolios in half, devoting one side to traditional long-term SRI techniques and the other side to shorting, thus capitalizing on both ups and downs. On both sides, Green Cay analyzes financials first, identifying “cheap” stocks on the long side and stocks with downward momentum on the short side.

“On the short side, we narrow the field down to 50 stocks we would short, and send them to our ethics professors and SRI consultants to rank them according to bad values, and we short accordingly, working our way down the list,” Ms. Siebels-Kilnes told SocialFunds.com.

Green Cay’s definition of bad values includes environmental mismanagement and employee mistreatment.

“We call the companies with bad values and tell them we’re shorting them and why,” she added.

Some believe this communication speaks louder than the SRI practices of shareowner dialogue or negative screening, which excludes companies from investment.

“Frankly, I found negative screening to be ineffective,” said Ms. Siebels-Kilnes, who does employ basic SRI screens that exclude tobacco, alcohol, gambling, and handgun manufacturing. “When a little firm like Green Cay tells a company we’re not going to invest in them, they say, ‘So what?’”

“With shorting, we do make a difference, we do get reactions, we have had companies change,” Ms. Siebels-Kilnes told SocialFunds.com.

Take, for example, the instance of Vestel, a television and computer monitor manufacturer based in Turkey. Originally, Green Cay planned on taking a long position, but the customary site visit to companies being considered for investment revealed poor environmental stewardship and dangerous working conditions.

“Instead of going long, we shorted the stock, and told management we were doing so, and they actually changed practices: they put in new filters in their workplaces, cutting down employee sick days by half, and they also changed their emissions so they are better than the industry average,” explained Ms. Siebels-Kilnes. “The stock fell, and now we’re long in Vestel.”

Green Cay’s combination of short and long strategies advances another argument in favor of the business case for SRI, which holds that socially and environmentally responsible companies tend to outperform their peers.

“We believe that return and SRI go hand-in-hand: by doing long-term investment on one side of the portfolio and shorting based on bad-values ranking on the other side, we really combine return with SRI values, so you’re not giving up return by doing this,” said Ms. Siebels-Kilnes. “In fact, shorting the bad values companies really enhances your return.”

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