‘Weaponising the share register’: ASX 100 exposed to ‘green shorting’

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Fourteen per cent of the ASX-100 is exposed to technology created by a UK-based data analytics firm that uses artificial intelligence (AI) to help activist investors maximise profits from short selling stocks in companies with poor records on climate change.

The technology is developed by Irithmics, which was founded in 2012 after academic research drew parallels between information flow during financial market crashes and the spread of disease during public health crises. Just as epidemiologists analyse health patterns to reduce infections, Irithmics founder Grant Fuller said financial data can be analysed to identify risks and opportunities for investors.

Irithmics combines data from 250,000 global institutional investors with artificial intelligence and deep learning technology to predict how investors will respond to emerging risks and forecasts changes to asset allocations that can indicate stock price fluctuations.

Irithmics founders Grant Fuller and Balázs Boros, who say 14 per cent of the ASX-100 is exposed to their technology.

“The economist John Maynard Keynes said successful investing is anticipating the anticipation of others. Anyone in capital markets, that’s what they are really motivated by,” Mr Fuller said. “What we have done is focus AI on specifically answering that question.”

The technology is used by the London Stock Exchange to provide corporate issuers with data to allow participants to better understand investor behaviour. But the firm now is responding to demand from a new cohort of investors – activist short-sellers.

The Age and Sydney Morning Herald previously revealed US fund manager AQR had warned the prudential regulator of the rising use of so-called ‘green shorting’, where investors can short-sell carbon heavy stocks to reduce portfolio emissions or agitate for change.

Mr Fuller explains AQR is not a client, but activist investors are now using Irithmics’ technology in Australia and abroad to enter short sell arrangements at the optimal time to maximise profits from falling stock values of carbon-heavy companies or those with poor records on climate.

“We didn’t chase people at all. The activist investors in particular are one of the largest client segments we have,” he said.

“These are not the protestors that waive the placards and chain themselves to fences, these are social movement activists that are pointing out deficiencies in the way companies are structured and run.”

“They’re saying, ‘Pay attention’.”

Mr Fuller and co-founder Balázs Boros visited Sydney and Perth in February last year to meet with interested fund managers as well as companies that are vulnerable to the rising trend of ethical and activist investing that can use the technology as a defence mechanism.

“One of your countrymen pointed out that we are weaponising the shareholder register. I liked the phrase. That’s a very flamboyant description of what we’re doing,” he said. “But I would say we’ve created tools to allow people to leverage the shareholder register.”

Non-disclosure agreements prevent Mr Fuller from identifying the parties that use Irithmics, but he claims now 14 per cent of the country’s 100 largest listed companies are exposed to the technology.

“One of the reasons we did Australia was because of the mining sector. The ASX100 is very heavily biased towards mining as a sector. In particular, it is a sector that is very vulnerable to this ESG criticism.”

Large institutional investors with ESG mandates often justify exposure to fossil fuel producers by claiming stakes are held passively through index funds. Mr Fuller said “that can be changed” if these investors now short-sell carbon heavy stocks to alter the market index another “social sanction” tool.

“By affecting or anticipating a drop in a market cap and share price, you are effectively changing the weighting of an index, that means you are re-calibrating or redefining the constituents of the index,” he said.

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