Whenever big money flows into a hot new sector, it seems inevitable that publicly traded companies will fall short of the hype and hope.
One of the current markets hottest areas invests in the environment, social affairs and governance. And like that Cryptocurrency boom and Increase in cannabis stocksThe flood of money was followed by allegations of fraud.
These claims are often made by activist investors and short sellers who bet on the depreciation of stocks or bonds. As interest in ESG has grown, they have looked for companies where investors have overlooked errors and fraud in the rush to get involved in a technology or sector.
While these short sellers are often targeted by attacked companies, they play a key role in identifying these issues.
Shorts are important in ESG because they’re so hot right now, says Rob Furdak, chief investment officer of ESG at Man Group, a hedge fund. “People are looking for a sustainable point of view and want to step in when they see the potential of these new technologies as real game changers,” he says.
So far, two high-profile cases have been affected by the short seller Hindenburg Research. It has accused Nikola, an electric truck company, and Loop Industries, a Canadian plastics recycler, are exaggerating their technological skills. Both companies operate in areas with a toughened glass sweetspot – a technology that brings environmental benefits.
Nathan Anderson, founder of Hindenburg, says the ESG sector is particularly fertile ground for companies that overdo what they do. “When people are feeling good about giving their money away or investing it, they are less likely to look carefully into where it is going,” he said.
Nikola, who had been supported by activists Jeff Ubben and General Motors, was accused by Hinderberg of “intricate scam” of exaggerating his technology and faking product launches.
The company called the report “false and misleading” and issued a detailed report refutation of claims. However, it admitted one of the company’s claims – that it was rolling one of its trucks down a hill in a video This made the vehicle look like it could move on its own.
Hinderberg also targeted Loop, which claims to have a revolutionary technology that can extract recyclable plastic polymers from garbage. Hindenburg allegedly The company has never found a way to get its process up and running on a large scale. Loop’s claims are “technically and industrially impossible”.
According to Loop, Hindenburg’s claims were “baseless, false, or based on the first iteration of Loop technology.”
In an ideal world, flawed companies would be caught by regulators or debunked by investors doing their due diligence before they ever reach a magnitude. In reality, however, it doesn’t always work that way. Scientific Research has shown Short sellers play an “important role in identifying, detecting and mitigating the effects of financial misconduct”.
However, there are some who see short sellers doing more harm than good. Hiro Mizuno, former head of the world’s largest pension fund, has stopped lending securities out of the Japanese system last year because he believed short selling goes against his mission of long-term value creation.
“I’ve never met a short seller who has a long-term perspective,” he said at the time. He has since been hired as a board member at Tesla, where CEO Elon Musk was an outspoken critic of the short sale.
And while short sellers can fill the gaps when corporate governance, due diligence, and regulators fail, it’s not clear whether they’re a net plus, argues Neil Foster, partner and head of impact investing at Brown Rudnick law firm.
Even legitimate companies can become short targets if they go public at the wrong time, and that can hinder innovation, he says. Mr. Foster adds that companies employing loss-making technologies and life sciences need to ask themselves at an early stage whether to put themselves in a position where they can be shorted.
However, short sellers believe their actions can fuel better ESG outcomes and push the laggards to improve.
“We want companies that offer real technology that can change the world’s environment,” said Anderson. “Part of that has to be minimizing the flow of investment to fraudulent companies.”