Short sellers are turning their attention to companies servicing the green revolution, such as clean-tech companies, battery manufacturers, and electric vehicle manufacturers.

Out of the 96 total short campaigns globally in 2022, 32 were targeted at companies with a link to clean energy, according to Insightia’s Activist Shorts module.

Green shoots

“Clean-tech and ESG providers were the best markets for short sellers in 2022,” Blue Orca founder and Chief Investment Officer Soren Aandahl told Insightia, adding that ESG especially was a “gift that keeps on giving as this era really unwinds.”

Blue Orca set its sights on several clean-tech companies in 2022, condemning Canadian battery recycler Li-Cycle Holdings in March as being a “near fatal combination of stock promotion, laughable governance, a broken business haemorrhaging cash, and highly questionable Enron-like accounting.”

The short seller also accused U.S. wood pellet manufacturer Enviva of inflating profits and “flagrantly greenwashing” its wood procurement.

Others targeting the sector include Culper Research with an ongoing campaign against Piedmont Lithium that began in June 2022 based on an argument that it had “little hope of ever producing battery-grade lithium from its centerpiece North Carolina mine, given overwhelming local pushback and management ineptitude.”

And Fuzzy Panda said the prospect of a potential buyout of U.S. electric vehicle manufacturer Lucid Group was “fake news.”

Cutting corners

Spruce Point Capital has identified some targets in the green space in recent years including a 2021 campaign against Danimer Scientific, a company that provides renewable biopolymers that are used to create biodegradable plastic products. The short seller took issue with the company’s label as an “ESG player that will disrupt the plastic industry,” instead calling out its “lacklustre technology” and “corporate governance red flags” involving management and the board of directors.

The short outfit’s founder and Managing Partner Ben Axler told Insightia that inward investments from institutional investors have been driving up valuations of “environmentally considerate” stocks. However, he warned this trend has been shown to incentivize some companies to cut corners.

“It also invites opportunities for younger and less mature companies attached to the environmental theme to come public faster than they ordinarily should, and without a clear path to profitability,” Axler said. “It’s these conditions why we believe clean-tech and environmental solution companies were targeted by short-sellers in 2022.”

This is evidenced in a report by Grizzly Research last month, arguing that greentech claims made by Sigma Lithium appear to be “only fluff, as for the moment, none of them have been applied or confirmed by their operations.”

A perfect storm

As well as exposing inadequate management on the company side, short sellers have warnings for the buy-side. According to Aandahl, investors are faced with a “perfect storm” with an increasing amount of capital and investor mandates “chasing a very narrow universe of actionable investment ideas and legitimate ESG destinations.”

He told Insightia that the policy tailwinds on ESG investments, that encourage pension funds to invest in the sector and curry favor among investors, only serve to push more capital to “a corner of the market which has very few legitimate destinations to put them.”

This results in an increasing amount of capital pushing up valuations to “stratospheric levels,” as well as flowing into lower quality ESG and clean-tech investments, leading to investors chasing “unproven technologies and hype in the name of an otherwise worthy goal.”?

“It results in all sorts of snake-oil salesmen having access to capital where otherwise investors would be far more skeptical,” Aandahl concluded.

Contemplating the sectors that are likely to prove the most attractive for short sellers over the coming months, Axler told Insightia that “many companies in the alternative energy space are pitching a strong ESG message and receiving premium valuations.”

“Any time there are incentives for companies to meet a certain theme or business requirement that receives a higher valuation, you’re going to find some companies that try hard to get that valuation by cutting corners, which in turn exposes them to short sellers,” he concluded.