This strategy applies to “ESG” securities held by mutual funds/ETFs or pension funds that are held to ESG mandates and required to vote in proxies.
Securities that are held in these funds, around the time of the annual shareholder meeting, will have statistically significant lower levels of short interest relative to their underweighted ESG fund security peers.
This different in short interest would be due to differing levels of stock inventory on loan demanded by short sellers.
Shares on loan cannot be proxy voted according to fund guidelines unless the security is physically held by the Beneficial Owner on the day of record.
Most securities lending agreements between counter parties (ISDAs) are slow to change and not updated regularly, so the proxy votes related to ESG mandated funds could be exploited.
Leading up to the day of record the securities with higher % held in ESG mandated funds would in theory outperform their peers around the time of the company shareholder meeting, because less shares are being sold short.
What do you think of this theory?
Is there anything in academia to discredit or support?
Interesting thought. I have never heard of this idea before and it could work. The problem in practice is that very few stocks have a large share of stocks out. Here in the Uk I can count on two hands the stocks with more than 5% out short. So the problem is that the effect you describe may be very small in practice.
Ok hear me out on this one,
Short term ESG alpha microstructure...
This strategy applies to “ESG” securities held by mutual funds/ETFs or pension funds that are held to ESG mandates and required to vote in proxies.
Securities that are held in these funds, around the time of the annual shareholder meeting, will have statistically significant lower levels of short interest relative to their underweighted ESG fund security peers.
This different in short interest would be due to differing levels of stock inventory on loan demanded by short sellers.
Shares on loan cannot be proxy voted according to fund guidelines unless the security is physically held by the Beneficial Owner on the day of record.
Most securities lending agreements between counter parties (ISDAs) are slow to change and not updated regularly, so the proxy votes related to ESG mandated funds could be exploited.
Leading up to the day of record the securities with higher % held in ESG mandated funds would in theory outperform their peers around the time of the company shareholder meeting, because less shares are being sold short.
What do you think of this theory?
Is there anything in academia to discredit or support?
Interesting thought. I have never heard of this idea before and it could work. The problem in practice is that very few stocks have a large share of stocks out. Here in the Uk I can count on two hands the stocks with more than 5% out short. So the problem is that the effect you describe may be very small in practice.
Appreciate your insights as always.
Agree, in theory vs. practice may not work out.
I'll go back to the lab and let you know if I discover anything noteworthy to share in the future.
This is ... exactly the right point