Activist short-seller targets environmental failings

A new activist investment fund that focuses exclusively on environmental issues has touted its first success after targeting a company that provides emissions-intensive electricity generation to data centers.

Sunlight Partners’ report, released in May, singled out Babcock & Wilcox (B&W), a manufacturer with close to 160 years of experience with steam boiler technology that recently announced deals to power data centers.

B&W’s stock fell 13 percent in the week following the report, which alleged that the company’s proposed projects were unlikely to be built, and that, in any event, its technology was inefficient and outdated. In a second-quarter summary released last month, Sunlight, which bet on B&W’s stock declining, said the fall had driven its own 12 percent return.

B&W did not respond to a request for comment. Its stock, which was priced at $19.65 when the report was released, is currently trading at $9.35.

As is often the case, it is likely that more than one factor pushed down that price; the stocks of other AI-related companies also declined over the same period, noted Will Funnell, a former options trader who co-founded the fund. But B&W underperformed relative to the trend, he said.

Environmental targets

Sunlight, which is based in Brisbane, Australia, plans on releasing between six and eight reports annually, said Funnell. The targets will be companies it believes are guilty of greenwashing, excessive waste or other environmental sins, with a focus on less diversified firms for which attacks on an important line of business can have bigger impacts. 

This short-selling approach contrasts with that of activist funds that try to increase stock prices by pressuring companies to reform. “We’re looking more for the worst actors,” said Funnell. 

He declined to state the value of the fund, but said that he was in talks over what would be its first major institutional investment. “We think this fund scales up to $200 million, and we still have considerable headroom,” he added.

Impact alignment

Sunlight says that it aims to generate environmental impact alongside returns to investors, but the two are not necessarily aligned.

Like all short-sellers, Sunlight will need its campaigns to have an immediate impact, noted Mark DesJardine, an expert in shareholder activism at Dartmouth College. It’s possible that the fund will exit a short position and achieve its financial aims before the target company commits to changes, thus leaving the fund’s environmental goals in doubt.

“It’s a relatively rare strategy to play because when we think about transforming a firm’s business model to get into more environmentally friendly businesses, that’s typically something that plays out over years, not over weeks and months,” said DesJardine.

Still, the fund can generate environmental benefits even if changing company practice is not something it can claim to compel, argued Funnell. “What we do is put information into the market that revises expectations,” he said. “Revised expectations inform investment decisions, which in turn affect environmental outcomes.”