How to use ‘green shorting’ and carbon tax to help spur corporate climate action

This new investment strategy is every CEO's worst nightmare.

James Shackell
February 4, 2022
Carbon emissions

When it comes to convincing your CEO about the importance of taking climate action, money talks.

When resources (say, for example, solar energy) get cheaper, they become more popular, and they start to make more economic sense: to consumers, governments, the market and, crucially for you, for businesses.

On the flip side, when resources (like, I don’t know, fossil fuels) become more expensive, onerous, hazardous or heavily taxed, they become much less appealing.

This is why renewable energy technology is booming; it’s literally too cheap and profitable to ignore anymore. It’s also why we might be about to see a rise in something called ‘green shorting’ or ‘carbon shorting’.

And for those looking to inspire more climate action within the workplace, carbon shorting – and a potential carbon tax (one that actually works) – could turn out to be a pretty powerful tool indeed. Here’s how.

What is carbon/green shorting?

Green shorting seeks to pressure heavy carbon emitters into decarbonising their operations by shorting their stock.

 ‘Responsible’ investing is nothing new, and has long been a tool for investors to support organisations and companies who are more future, people and planet-oriented. Responsible investing 101 typically involves divesting away from heavy emitters and intoESG (environmental, social and governance) securities. ESG investing has been a booming global investment trend for years now.

‘Green shorting’ goes one step further. It’s an escalation plan where investors deliberately ‘short’ the stock of heavy emitters, betting on their demise, profiting from their downfall, and hedging their risk at the same time. Great for potential investors, not so good for carbon emitters.

Why does this look like IRL?  

Green shorting is becoming a hot issue because, either through direct government intervention or new carbon trading markets, a global ‘carbon tax’ seems pretty inevitable. That means any organisations (and by extension, investors) linked to carbon-heavy activities are sitting on a bubbling volcano of financial exposure. This is known as your ‘carbon short position’, or how much your company stands to lose if the market goes pear-shaped.

Why does this matter? Take a company like ExxonMobil, a heavy emitter currently scrambling for a net zero strategy that will appease investors.

According to the Harvard Business Review, in 2020 ExxonMobil released 112 million metric tonnes of CO2 “equivalent”(that’s carbon mixed with other greenhouse gases, like methane). If carbon was suddenly priced at $100/tonne, which is the price many economists predict,ExxonMobil would owe $11 billion annually on their emissions alone. “Since the company has earned only $8 billion on average over the last five years,” HBR notes, “this means they would rapidly be bankrupt.”

If your organisation has been sitting on the carbon fence for a while, the prospect of having its stock devalued by aggressive ‘green shorting’ could be enough to make senior management reconsider their emissions policies.

And if your organisation isn’t on the stock exchange, the prospect of a carbon tax alone should be enough to spur even the most on-the-fence CEOs to pick a(renewable-powered) side.

What does this mean for you?  

You can see why getting off carbon suddenly makes a lot of fiscal sense. If your organisation is tied to carbon-heavy activities, you’re arguably sitting on a huge amount of financial exposure. It’s only a matter of time until investment groups start targeting companies with carbon liabilities, in the expectation they’ll be caught out by a rapidly changing market.

 “Green shorting is an investment strategy we’ll hopefully see more and more of over the next few years,” says WorkForClimate Director, Lucy Piper. “With Australian Carbon Credits going through the roof, more and more investors are seeing the value in ESG investment. It’s also one of the easiest ways to convince your organisation that decarbonisation makes economic sense. Any organisation that bets on fossil fuels is going to come up short.”

The good news is, any organisation can work to decarbonise(and, by extension, limit their exposure). We’ve got a bunch of handy resources to get you started over here.  

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