ESG Reporting in Long-Short Portfolios

MSCI ESG Research draws on our consultation with owners and managers of long-short portfolios to recommend best practices for fund-level ESG and climate reporting.

The topic is of considerable interest to market participants and observers, yet there is currently no clear global consensus or regulatory guidance for market participants to follow. MSCI’s analysis, concludes that:

• Reporting just net ESG and climate metrics for long-short portfolios potentially conflates, and may obscure, investors’ intent, impact, ownership and risk management.
• Investors may therefore wish to separate the ESG and climate disclosures for the long and short portions of their portfolios, to be as transparent as possible.
• In theory, it is possible to create ESG risk-neutral strategies, but the involvement, impact and emission attributes of such strategies would not be considered as neutral in the real-world sense.
• Reporting for ESG and climate transparency should be treated differently from reporting for ESG and climate risk exposure, but both are important requirements.
• There is limited evidence that shorting is similar to or a better tool than divestment, for ESG purposes. MSCI research suggests that, on average, stocks with high short-selling demand have not had a higher cost of capital, and so short selling has had limited influence on companies’ management to adopt ESG and climate-related best practices.