“Forward-Looking” Standard for Sustainable Securities Lending

Draft framework issued for consultation, seeks to support shift to more dynamic approach to collateral management. 

Sustainable investment principles need to be more fully embedded into the collateral management processes of securities lenders, said the issuers of a new draft standard aimed at enabling a dynamic approach and delivering more “tangible results” for investors.

According to the Global Principles for Sustainable Securities Lending (Global PSSL), the “forward-looking” standard is designed to improve the integration of sustainable investment policies into the selection and management of collateral accepted by asset owners and managers when lending stock.

The draft standard, which is open for comment until September 15, emphasises greater transparency and flexibility in pursuit of impact, while maintaining the importance of existing lenders’ priorities such as liquidity and safety.

“It is clear that the securities lending sector is keen to follow a sustainable agenda,” said Dr Radek Stech, Founder and CEO of Global PSSL. “However, it is imperative that organisations align with a holistic and authentic solution that delivers tangible results. Global PSSL is working with the whole community of practitioners to create a unifying market standard to fulfil this need. This objective is undoubtedly ambitious, but it is a necessary step if we are to ensure securities lending aligns with best practices in sustainable finance.”

Global PSSL is a non-profit voluntary initiative focused on promoting sustainable securities lending and broader sustainable finance through research, education and international collaboration. It works with prominent beneficial owners, agent lenders and other stakeholders in the securities lending sector.

One eye on the future

To facilitate a forward-looking approach, the draft standard cites eight over-arching objectives which it believes should inform current practices throughout the collateral lifecycle, but also serve as foundations for more integrated future processes. In the standard, Global PSSL highlights ways in which collateral schedules, cash re-investments and collateral re-use could all become more dynamic and responsive to market developments.

The growing importance of ensuring securities lending practices are aligned with sustainable investment principles was underlined in the stewardship reports of large UK asset owners and managers earlier this year. This initially focused on ensuring that stock lending activity does not compromise the ability of investors to vote at AGMs, including on ESG-related themes. But lenders are increasingly keen to ensure non-cash collateral received from borrowers meets the same sustainability-led investment criteria as longer-term holdings.

The draft standard is based on input from market participants, including hedge funds, and draws on Stech’s research on green bonds and project finance as part of the Sustainable Finance – the Law – Stakeholders (SFLS) Network of University of Exeter Law School, as well as collaboration with Roy Zimmerhansl, Practice Lead at Pierpoint Financial Consulting and an advisor to Global PSSL.

In a recent commentary article for ESG Investor, Zimmerhansl said lenders’ collateral management processes needed to be sufficiently flexible to reflect an “nuanced” views on the ESG-related profiles of firms in the same industry, rather than rely on blanket exclusions.

“Given the clear indications of growing ESG-awareness, securities lending must adapt to what investors require rather than continue to apply tried and tested large-scale solutions. One size doesn’t fit all today, let alone tomorrow,” he wrote.

In March, the Pan Asia Securities Lending Association (PASLA) and the Risk Management Association (RMA), co-launched their Global Framework for ESG and Securities Lending (GFESL), with the endorsement of the International Securities Lending Association. PASLA and RMA said the framework would provide “standardised options, essential background and key considerations” across six main areas of investment operations, as well as suggestions on best practice.

In a statement accompanying the new release, Stech and Zimmerhansl said the strategic alignment of securities lending collateral with ESG would enhance the broader sustainable finance agenda and reap long-term rewards.

“This standard encourages this forward-looking alignment by emphasising current practices and outlining pathways to more interconnected and ambitious future capacities. Such a progressive, step-by-step approach will increase transparency whilst assuring safety and liquidity,” they said.

Stech told ESG Investor that Global PSSL will soon be releasing its final iteration of its core principles. “These have been undersigned by several prominent industry members and will herald a new era of industry-led ESG self-governance,” he said. “We will continue collaborating with the whole community of practitioners and are willing to engage international organisations, central banks and regulators.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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