Update to 2021 framework reflects growing integration between ESG investing and securities lending, but concerns remain over transparency.
The Global Alliance of Securities Lending Associations (GASLA) has this week released a new version of its framework for considering ESG factors in securities lending, with further guidance on voting and collateral management.
It comes as the Global Principles for Sustainable Securities Lending (Global PSSL) is working on a transparency initiative with UN reviewers.
GASLA, which comprises five regional securities lending associations, first launched a global framework on ESG and securities lending in November of 2021, after a split from some of the organisations now involved in the Global PSSL.
Andrew Dyson, CEO of the International Securities Lending Association (ISLA), said the updated framework was designed to help challenge misconceptions that securities lending and the consideration of ESG factors could not align, and outline areas where the two intersect. It is aimed at institutional investors, providing practical guidance to assist them when aligning their decision to lend, with their responsible investment policies.
“We’ve now got a pragmatic framework around which they can structure their thinking and internal conversations and be truly informed when making decisions.”
On voting rights, GASLA recommended that securities lenders develop a policy for recalling loaned securities based on ESG considerations in a proxy voting framework. This should involve identifying the types of material shareholder resolutions on which lenders wish to vote by company and by issue.
Regarding the ESG implications of accepting non-cash collateral, GASLA said lenders’ revised collateral guidelines should also be adequately diversified “with a key aim of properly mitigating credit risk, as well as ensuring collateral is liquid and can be realised in the event of default”.
Securities lending controversy
The US$2.5 trillion securities lending business came under the spotlight in 2019 when the world’s biggest pension fund Japan’s Global Pension Investment Fund (GPIF) rocked the market by ceasing securities lending over governance and transparency concerns.
Its then chief investment officer Hiromichi Mizuno was widely quoted at the time discussing the negative impact of short selling, a controversial practice associated with securities lending, where borrowers aim to profit by trading the lent security and buying them back at a lower price. Lenders are paid a fee during the loan period. The global securities finance industry generated US$850 million in revenue for lenders in February 2023, according to DataLend.
Mizuno left GPIF a few months after the move and joined the board of electric car firm Tesla, whose chief executive Elon Musk has also been a high-profile critic of short selling.
Since, GPIF has reportedly sought data on the effect of its securities lending decision. A spokeswoman for GPIF told ESG Investor that GPIF continues lending of fixed income securities.
As well as concerns around fuelling short-selling, especially in cases targeted firms with strong ESG credentials, asset owners and managers have previously noted the potential difficulties of exercising voting rights while conducting a securities lending programme, as well as challenges in ensuring collateral received confirms with ESG-based exclusions.
Dyson said that criticisms around securities lending and ESG had waned because institutions and the general public have seen the benefits of securities lending within the ESG framework.
Earlier this month, US asset manager Invesco announced that it would include its ESG ETFs within its securities lending programme in a bid to boost the “consistency and price competitiveness of its product range”.
German asset manager DWS had one of the first European ESG ETFs to engage in securities lending last year, according to ETF Stream.
Invesco said following a review of its collateral rules, ETFs with ESG characteristics could be included in its securities lending programme without compromising the sustainable characteristics of the ETFs. A separate lending policy has been designed for the ESG funds.
Dyson said GASLA’s ESG framework had developed to include more practical guidance especially in the areas of voting and collateral management.
Transparency of securities lending
In related news, Global PSSL is working on a transparency initiative for securities lending with UN reviewers.
Improving transparency in securities lending has been the focus of regulators in recent years with the EU introducing Securities Financing Transaction Regulation (SFTR) in 2020 that requires lenders to provide material terms of transactions to a public register. The US Securities Exchange Commission is proposing similar regulation.
Radek Stech, CEO of Global PSSL, welcomed the new framework from GASLA, which he claimed underscored the holistic principles of Global PSSL. But he added that he was concerned that GASLA’s framework did not address the whole value chain perspective, and was uneasy with its approach to transparency.
GASLA’s framework says that while transparency on onward lending is not available to lenders in any jurisdiction, lenders can “take comfort” from the moves toward regulatory transparency in leading jurisdictions, such as Europe, under the Securities Financing Transaction Regulation. Stech said: “Global PSSL is concerned that the ambiguity of this statement may confuse less informed stakeholders in the context of jurisdictional limits. We are acutely aware of this issue and have been addressing this as part of our ongoing 3P Transparency initiative.”
The initiative will see the launch of principles on transparency in securities lending later this year.
Global PSSL, which launched in 2018, counts a mixture of asset managers, asset owners and securities lending agents as signatories, included Dutch pension fund PGGM and UK pension fund Nest.