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What are the ESG concerns of What is short selling’s role in capital markets? Bridget Realmuto LaPerla
long-term investors?
Before tackling whether short selling harms long-
A growing number of asset owners and managers are term value, we need to understand its role in capital Bridget Realmuto LaPerla is a vice president and Prior to State Street, Bridget managed a global team
voicing concerns that securities lending limits their markets. Empirical studies that explore short selling’s head of ESG research at State Street Associates. of researchers at S&P Global Trucost, evaluating
ability to exercise proper stewardship on underlying role in markets tend to fall into three main categories: In this role, Bridget creates and promotes industry the environmental performance of equity and fixed
investments, highlighting three key concerns: (1) cross-country variation, (2) natural studies and, (3) leading research on environmental, social and, income securities across industries and asset classes.
time-series and cross-sectional analyses. Each research
i. The transfer of stock ownership rights. When methodology provides a different perspective on the governance themes (ESG). She applies quantitative While conducting buy-side ESG research at Domini
methods to understand ESG signals in the market,
Impact Investments, she frequently spoke at industry
stocks are on loan, the voting rights for those securities lending market. leverages insights from State Street’s academic events as an expert and a NYC Chapter Leader for
shares are also transferred. This is inconsistent partnerships and data and, drives increased Women Investing for a Sustainable Economy (WISE).
with wishes of asset owners who mandate that Cross-county variation studies uses variations in engagement with clients on these topics. Earlier in her career, she quantified the social impact
their asset managers need to conscientiously regulations and market practices across countries to
exercise voting rights on all their shares. study the impact short selling has on market efficiency. As a sustainable finance specialist with over a of government funded prevention programs at the
NYC Department of Homeless Services. Bridget
Natural studies analyze the impact of short-selling
ii. There is a transparency concern because owners constraints and regulations on various events (e.g., bans decade of research experience, Bridget advises the holds a M.B.A. from Columbia Business School and
Columbia University Trustees as a voting member
a B.A. from The George Washington University. She
do not have clarity on who borrows shares nor the during the 2008 financial crisis). Lastly, time-series and of the Advisory Committee on Socially Responsible completed a Certificate in Sustainability Analytics
reasoning behind those decisions⁷. cross-sectional analysis uses daily or intra-day stock- Investing. She also serves as a policy expert on the from Columbia University, where she was awarded
loan data to examine the impact of shorting flow at
iii. Underlying these points is the perception that short securities level. ESG Integration Group at the Emerging Markets a Peter DeSimone Scholarship by the Forum for
Investors Alliance.
Sustainable and Responsible Investment (US SIF).
sellers (borrowers) destroy long-term value due to
a misalignment in the longer-term investment time- The two primary considerations when examining short
horizon of lenders (beneficial owners). This raises selling’s impact on capital markets are liquidity and price
issues of “short-termism,” which can be defined as discovery. Liquidity is the ease with which an asset can
the “excessive focus on short-term results at the be sold or bought and is commonly proxied for by the
expense of long-term interests⁸.” bid-ask spread. In illiquid markets bid-ask spreads are
wider resulting in costlier trades.
Asset owners are not the first institutions to direct Concerns have been raised
concerns at short sellers. Financial regulators have Price discovery is a critical process in financial markets in that short sellers could
historically viewed short selling with a level of which the proper price of an asset is determined based
skepticism, especially during times of financial turmoil. on the incorporation of all available public information. potentially undermine
For example, in the 2008 financial crisis the SEC long-term stewardship
pointed to short sellers as a reason behind the sharp Liquidity: In theory, the impact of short-selling
decline in prices and banned short selling on 799 constraints on liquidity is ambiguous. Numerous efforts by mispricing
financial stocks⁹. The continued debate has attracted studies have shown that short sellers are informed or not considering
interest from academics, which we can turn to for a market participants – increases in borrowing rates ESG characteristics
better understanding of the role of short sellers in or shorting demand are correlated with abnormal
capital markets. negative returns¹⁰¹¹.

⁷Suspension of Stock Lending Activities. December 3, 2019. GPIF ¹⁰Boehmer, E., Jones, C.M. and Zhang, X. (2008), Which Shorts Are
⁸CFA Institute Informed? The Journal of Finance
⁹Baja, V. and Bowley, G. (2008). “S.E.C. Temporarily Blocks Short Sales of ¹¹Cohen, L., Diether, K. B., & Malloy, C. J. (2007). Supply and demand shifts
Financial Stocks”. New York Times. in the shorting market. The Journal of Finance

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