Hedge Funds Short ESG Market Darling Credito Real – The Wall Street Journal

Mexico’s largest payroll lender has had a tough year. Wall Street short sellers are betting it’s going to get worse.

Credito Real SA B de CV raised money from bond funds and the U.S. government in recent years, using its status as a lender to Mexico’s poor to tap into the booming trend of socially conscious investing. Hedge funds including Millennium Management LLC and Bybrook Capital LLP have questioned the company’s accounting and wagered that prices of its roughly $2 billion of bonds will tumble, according to people familiar with the matter. Millennium and Bybrook declined to comment

The company has made great progress in reassuring investors, a spokeswoman for Credito Real said. Management is employing a strategy with “a much clearer focus on payroll loans now and a renewed emphasis on transparency,” she said.

Environmental, social and governance investing took off in recent years, allowing companies that claim ESG attributes to raise capital with ease. The controversy over Credito Real’s finances shows that such credentials don’t insulate investors from market losses.

Credito Real was “a very popular name but that doesn’t mean people were spending the time to assess them,” said a Swiss bank trader who bought Credito Real bonds for years before selling out this spring. “There was a chase for yield and they got on the investment-bank recommendation lists and people just kept on buying.”