Last month I caught up with Matthew Blume, the Director of ESG Research and Shareholder Advocacy at Appleseed Capital. I wanted to chat with him about the idea of shorting stocks of “bad actor” companies, an idea that logically follows from some impact investing theories, but is not frequently utilized.
Sonya: Last year Appleseed opened one of the first long/ short impact investing funds. Can you tell me a little bit about your thoughts and motivation around bringing the idea of shorting into the impact investing equity space?
Matthew: We have been running a long/short ESG portfolio strategy since late 2014, and in October of 2016, we formed a limited partnership as another option for outside investors. We are really excited about this strategy because we believe it is truly an innovation in the impact investing space. ESG and impact investing have been gaining traction for quite some time now, and there are new ESG investment products popping up almost daily. However, the existing impact products tend to focus on screening out companies with poor ESG performance and purchasing companies with strong ESG performance. We believe this kind of analysis and screening reduces investment risk and can enhance returns. But why stop there? If we believe that screening out poor ESG performers reduces investment risk, then logically we should conclude that actually shorting some of these poor ESG performers, especially those with high valuations, should result in enhanced investment returns for our investors with reduced market exposure. At the same time, selling a company’s stock short should theoretically raise that company’s cost of capital, which can have a long-term societal benefit if the companies being shorted are engaged in unsavory business practices.
Sonya: Can you give me an example of a short sale that created positive impact and financial success for your shareholders?
Matthew: One of our short positions in 2016 was CoreCivic, Inc., formerly known as Corrections Corporation of America (CXW). CXW is the largest provider of prison detention and corrections services to U.S., state, and local governmental agencies. From a larger societal view, privately-run prisons have a very different mission than one run by a government agency; by definition, private for-profit prisons emphasize profitability above all else. As a result, private prisons focus on high levels of utilization rates, leading to potential prison over-crowding and unclean conditions. In addition, investments in healthy food and reasonable healthcare are kept at a bare minimum, as the offering of nutritious food and quality healthcare negatively impact company profits. Simply put, in addition to the human rights issues, we believe the business model of private prisons is unsustainably flawed and broken. We shorted CXW with this thesis in mind at a time when the company had a high market valuation. Our thesis played out in August 2016 when the U.S. Department of Justice (DoJ) concluded that private prisons do not measure up to government-run prisons. The valuation of CXW plummeted once investors and the Obama administration recognized that the company was an unsustainable ESG miscreant.
Sonya : Do you also do shareholder engagement?
Matthew: We most certainly do. We have been actively engaging portfolio companies since 2013. Since then we have filed numerous shareholder resolutions that have resulted in some very positive changes. After a multi-year battle, we compelled an energy services company to file a comprehensive sustainability report for the first time in the company’s history. We were also successful in getting a leading manufacturer of off-road tires and wheels to incorporate a commitment to board diversity in its company charter. These are just a couple among a number of successes. We are very proud of the work that we’ve done and continue to do on this front.
Sonya: What interesting project are you working on now?
Matthew: Right now I am preparing for our 2017/2018 shareholder engagement efforts. Each year we engage with portfolio companies that we think have significant opportunities for improvement, and often these engagements result in our filing shareholder resolutions. At this point in the process, we are looking closely at our portfolio to determine where our engagement efforts would be most impactful. At the same time, we are communicating with other impact-focused asset managers to try to identify opportunities to co-file resolutions with portfolio companies that we have in common. The shareholder engagement process is different each year, and is always interesting and rewarding.
Sonya: How can advisors and clients learn more and get involved?
Matthew: Check out the 2017 Impact Report, go to our website, or chat with anyone on our team.
Sonya: I’ll link to the report and your website below.