Can Shorting Be Socially Responsible?

Socially Responsible Investing is the practice of investing in securities with the aim of both generating a return and making society better. The question many investors are asking is whether short selling is socially responsible.

An Example of Socially Responsible Investing

While the goal of every investor today is to make money first and foremost, the goal of a socially responsible investor is to also do good while making money. An example of socially responsible investing would be investing in a stock like Tesla Inc (NASDAQ:TSLA).

Buying into Elon Musk’s company would be socially responsible because the company would popularize electric vehicles if it succeeded. If that event occurred, there would be a lot less carbon emissions from cars and trucks because the world would use less gasoline and diesel if there were more electric cars on the road. There would also be a lot less coal plants as many industrial and residential areas would use solar and battery storage rather than electricity generated from coal plants. Moreover, Tesla would also likely save tens of thousands of lives per year directly and indirectly globally if it pioneers safe AI that could prevent drunk driving crashes and avoidable car accidents. If successful, Tesla would both generate a handsome return for investors and do a lot of good in the world.

Is Short Selling Socially Responsible?

Short selling can be both good and bad. On one hand, short selling during bear markets or bearish sentiment periods can cause the stocks of good companies that don’t deserve to be punished to be harmed. If the company’s stock falls too much due to the short seller shorting and initiating or adding to his position, the company could have a difficult time raising the necessary capital it needs and the company could even go under. If the company goes under, fellow companies similar to it could also go under. This would make a bad economy even worse and cause a lot of pain in the world. Shorting in this case would not be socially responsible.

Shorting a stock that is a blatant fraud, however, isn’t necessarily bad. Higher short interest is a signal for other investors to do more research on a stock. This could save an investor from investing in something that he probably shouldn’t be investing in. That’s not necessarily a bad thing. If the shorting causes the fraud to go under, society is ultimately more efficient as the fraud would not waste any more scarce capital resources. Shorting in that case could be socially responsible.

While shorting in that case is responsible, shorts have to watch out, there could still be a lot of short squeezes along the way between when he initiates his shorts and when his bearish thesis pans out. Shorts in those cases may be doing society good, but they may also suffer a lot of short pain.

Read more helpful articles at The Complete Guide to The Short Squeeze: An Educational Article List.

Disclosure: No Positions