Environmental, social and governance (ESG) is likely to be the single biggest agent for change in the way we think about how securities lending programmes operate in the year ahead, says International Securities Lending Association CEO, Andrew Dyson.
In his latest blog post, Dyson suggests that the Securities Financing Transactions Regulation and the development of a securities lending common domain model are likely to define the parameters of our market infrastructure going forward but ESG will drive the most overall change.
As the distribution of vaccines to COVID-19 inspires hope of a return to normality in 2021, Dyson suggests that investors are placing a greater emphasis on the wider green agenda.
This change in sentiment is leading to greater scrutiny around how securities lending interacts with the core principles of an ESG-driven investment framework, he states.
Dyson continues: “Whilst acknowledging the importance of this debate, I would also like to highlight the well-developed themes of responsible stewardship that already exist across the investment community and address key areas that relate to securities lending programmes, including active shareholder engagement and proper social and environmental scrutiny.”
He adds: “As we move into 2021, we will progressively be building ideas around our new ESG policy framework that will align our regulatory, advocacy, thought leadership and best practice efforts under the overall direction of our newly-established ESG steering group.”
The group was created as part of ISLA’s effort to absorb the Council for Sustainable Finance in November which had been semi-autonomous until that point and chaired by industry outsider Radek Stech.
ISLA has invited council members to join its in-house ESG working groups, which will lead its efforts in this arena going forward.
Stech has now formed his own venture, Global PSSL, which is advancing his vision for the principles for sustainable securities lending, and aims to standardise ESG across global markets.
Elsewhere, in ISLA’s last ‘Legal and Regulatory Broadcast’ of the year (available in the SFT podcast library) Dyson underscored the point that ESG was a central feature of the trade body’s work in 2020 and it will continue to hold centre stage in years to come.
ISLA’s new steering group is split into “four distinct pillars”, explains ISLA regulatory analyst Farrah Mahmood as part of the monthly update. These include: thought leadership, advocacy, regulation and best practice.
In 2021, the advocacy pillar will lead efforts to respond to key consultations such as in corporate governance and for changes to European long-term investment funds (ELTIFs) oversight.
The current ELTIF regulation imposes investment restrictions on securities lending and the governance consultation aims to introduce duties to ‘do’ rather than report, making this an “important battleground to promote the idea that securities lending is for the long term and not just the short term, as it is often mistakenly depicted as,” Mahmood says.
The regulatory pillar will focus its effort on the EU’s ESG Disclosure Regulation. There is an on-going consultation of the draft regulatory technical standards of this framework but the application of the rules remain unchanged and come into force on 10 March 2021.
The thought leadership pillar aims to work with Allen & Overy to create a whitepaper looking at how to align securities lending and ESG in a practical sense.
For best practice, Mahmood says ISLA has received a lot of queries about stewardship and governance of shareholders’ rights and voting in recent months.
“This is one of many topics, along with operational regulatory practices, ISLA will be reviewing to create an ESG policy framework,” Mahmood concludes.
Elsewhere, ISLA’s new collateral workgroup also has an ESG mission as it will seek to create a better methodology for securities lending participants to lend ESG assets in exchange for ESG collateral.
The current process involves consulting an ever-increasing collateral exclusions list, which ISLA acknowledges is sub-optimal.
