The Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) have launched a global framework designed to help institutional investors apply ESG principles to securities lending programmes.
Launched today, the Global Framework for ESG and Securities Lending (GFESL), based on extensive market research, focuses on what the two industry associations consider to be “six main touchpoints” between securities finance and Environmental, Social and Governance (ESG) principles.
The best practices, standardised options and essential background provided in the GFESL cover voting rights, transparency in the lending chain, collateral and cash reinvestment, lending over record date, the short side of the market and rehypothecation of non-cash collateral.
PASLA conducted a consultation process across the Asia Pacific region during Q4 2020, which attracted feedback from 150 senior industry professionals. This found that asset owners and managers want to take responsibility for managing ESG factors when lending securities, with 85 per cent seeking controls to address concerns over the compatibility of ESG principles with securities lending.
An RMA paper published in October 2020 found that 95 per cent of global asset owners and managers surveyed believed securities lending and ESG could peacefully coexist but, importantly, that only 18 per cent always applied ESG principles to their securities lending programmes.
It was out of this research that the industry associations developed the first edition of the GFESL, which leans towards practical and technical know-how for institutional investors and beneficial owners. Future iterations will be designed for other stakeholders in securities finance, such as exchanges and regulators.
Regarding voting rights, the GFESL suggests that institutional investors that lend
securities should consider developing a policy for recalling loaned securities based on ESG
considerations in their proxy voting framework.
To boost transparency, institutional investors should also implement minimum standards throughout the lending chain that reflect their sustainability framework.
When they lend securities, investors should apply the same ESG standards to non-cash collateral as they do to their investment portfolio, the GFESL recommends.
This GFESL framework advises that, when lending over a record date, investors should establish a clear policy on lending securities and communicate this with agent lenders. It also recommends monitoring counterparty exposure to weed out unusual activity.
Additionally, it recommends that lenders should determine whether the known and potential implications of rehypothecation are compatible with their corporate-level ESG commitments, especially with regard to governance.
PASLA director and communications officer Paul Solway says: “Integrating ESG factors into securities lending is increasingly important to all market participants, reflecting the broader shift towards sustainable financial markets.
“PASLA and our partners at RMA believe it is essential that the market has a shared understanding of how ESG and securities lending intersect, as well as a common
decision-making framework for managing these touchpoints.”
RMA director of securities lending, market risk, and credit risk Fran Garritt says: “Over the last year or so, the industry has established that ESG and securities lending are
complementary, not conflicting.
“The GFESL moves the agenda on to how we actually apply ESG principles in our
market, providing valuable technical guidance to beneficial owners in particular.”
The International Securities Lending Association’s (ISLA) also welcomed the guidelines. ISLA’S CEO Andrew Dyson says: “We are delighted to see the publication of these ESG guidelines for the investment community from PASLA and the RMA.
“Recognising that regional variances especially from a regulatory perspective will drive different outcomes, at least in the short term, it is vital that associations lead the way on defining best practice to fully align securities lending within an ESG investment framework across their various regions.”
