Last week I had the opportunity to be on the Christian Science Monitor's web cast show Ethical Investing with Laurent Belsie. One of the question's Laurent asked, "is shorting ethical", is an interesting one. While, personally, I think it is (this shouldn't surprise readers), other SRI investors may reach a different conclusion.

To me, there are really three reasons why an SRI investor would own a stock. By examining these reasons in the context of shorting, I think it may address this question. The reasons for an SRI investor to own a stock are:

1. to earn a return,
2. to benefit from the success of companies that reflects particular values, and
3. to influence company mangements by submitting and voting proxy resolutions in an effort to influence management.

I should add that, for some there may be a fourth reason, to increase the success of companies that reflect particular values. However, I would argue that this reason could only be legitimately stated by investors capable of establishing large positions that influences share value. In the SRI world, this universe of investors is limited to large institutions like CalPERS and/or significant investors in small and micro-cap stocks.

In the context of shorting, not all three of these long-only reasons hold up.

1. Obviously, earning a return is possible in a short environment. This is an ethically neutral action.
2. When shorting, it is possible to benefit from the failure of companies that do not reflect your values. Whether or not this is ethical depends on how an investor views this act. Certainly, profiting from suffering is not ethical. However, profiting from bad decisions may be ethical. To highlight this distinction let me provide an example. Shorting a company impacted by an unforeseeable natural disaster which may have harmed employees and interrupted business operations, would not be an ethical short. However, if this same company was based in an area prone to these types of events (hurricanes, floods, etc.) and did not take necessary precautions to protect the company and employees, then it may indeed be an ethical short.
3. Lastly, I would argue that shorting has minimal influence on management and that proxy resolutions are more impact. Like reason one, this is an ethically neutral action.

So in summary, I would view shorting as a generally ethical act assuming it is in the context of a company’s bad decision making.

If you would like to watch the web cast, for the rest of February, you can simply click on: http://www.csmonitor.com/ethicalinvesting. Once in March, it gets pushed down a bit, so you can go to the site above and click on the archives, which displays the last four months’ worth.