example, if you invest in green bonds in Sweden, he says, you’re
investing mostly in the very concentrated real estate sector and
therefore limiting your impact. To make a real difference, inves-
tors should sell short so-called brown bonds—betting against
debt securities with a direct or indirect link to a high- carbon-
footprint asset, such as a coal mine.
Short selling requires borrowing bonds and then selling
them with the intention of buying them back at a lower price.
Profiting from this is difficult to do. One drawback to such a
bearish bet is that, compared with equities, some corporate debt
is less liquid and harder to trade.
That illiquidity can drive up costs on what’s already an
expensive trade. The short seller has to pay a brokerage fee to
borrow the bonds until they’re returned—and the size of that
fee often depends on how scarce the securities are.
There’s also the risk of a short squeeze, which occurs when
a shorted bond jumps in price, forcing a short seller to close out the
position and buy back the notes. Even so, bonds are pretty much
capped in terms of how high their price can rise, as opposed to the
unlimited upside of a stock such as Apple or Tesla. Get the short
trade right, however, and it could “have a positive climate impact”
by pushing up the cost of capital for the borrower, Kjaer says.
In one of his recent talks with investors, Kjaer makes
references to shorting bonds from the coal industry—“by far the
worst offender.” He uses the example of the Adani Group, an
Indian conglomerate that’s developing the Carmichael coal mine,
a contro versial project in central Queensland, Australia. “The
Adani case is critical” because, if it goes ahead, it would be such
a massive polluter. The project is, in his opinion, “marginal,” and
successfully shorting the Adani bonds could derail it.
For some asset managers, the idea of doing green investing
through short selling carries little appeal. “It’s expensive and can
even add to the liquidity of brown bonds,” says Gordon Shannon,
a portfolio manager at TwentyFour Asset Management LLP in
London. “Most money is invested on a long-only basis, like us,
and shorting just doesn’t fit with our view of investing in com-
panies with positive momentum as they become more
But some polluting industries, Kjaer says, can be reached
only by shorting their corporate debt. “Most coal production
comes from unlisted companies that are in the bond market,” he
says. “Of course, a viable strategy is to go short those, and then
you have a positive impact on the financing cost, and over time you
are set up to win because of the repricing of the bonds.”
More Green, Less Red
Percentage change since Dec. 31, 2019
Bloomberg Barclays MSCI Global Green Bond Index Total Return Index Bloomberg Barclays Global Aggregate Credit Total Return Index
VOLUME 29 / ISSUE 2 61