Short sellers less active in ESG stocks

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Short sellers are less active in companies that perform strongly on environmental, social and governance factors as ESG ETFs attract record inflows.

North American companies that rank in the top 10 per cent based on ESG ratings have 1.8 per cent shares on loan, less than half of that seen worldwide, IHS Markit analysis shows.

Research analyst Simon Colvin says there are still plenty of short targets among firms ranked highly for ESG, but that this is likely company specific.

Hanes is the top target, despite scoring in the fourth percentile for ESG ratings, with 17 per cent of shares shorted, reflecting headwinds in US retail.

Tesla is among the most shorted stock globally. Chief executive Elon Musk regularly tells investors it is strongly overvalued despite his faith in its long-term future.

The finding comes as ESG ETFs enjoy record inflows with investors ploughing $950m into the products in 2016.

The record year of inflows looks set to be repeated again this year with $800m accumulated year to date taking total AUM to $5.5bn.

European investors have contributed to 60 per cent of this year’s inflows.

The analysis also shows that ESG stocks deliver significant outperformance over a five-year period.

The top 10 per cent of the North American market by ESG rating returned 1.2 per cent a month on average – a third more than the average 0.9 per cent.

In contrast, the companies ranked worst on ESG only delivered average monthly returns of 0.6 per cent – a third less than the average.

Colvin also notes that a Google trend analysis of ESG search terms shows interest in the topic doubling over the last two years.

Morningstar Direct data seen by Fund Strategy shows unique users of ESG fund data quadrupled in the month’s following Donald Trump’s inauguration to the US presidency.