Lender requests for environmental, social and governance filters in terms of non-cash collateral have become more prevalent across Europe compared to the US, according to vice president at Goldman Sachs Agency Lending Christel Carroll.
During the IMN Beneficial Owners’ International Securities Finance and Collateral Management conference, the “ESG in Securities Lending” panel discussed how lenders are reacting to the incorporation of ESG in the collateral market.
Goldman Sachs’ Carroll notes that within the US, collateral is predominantly cash and treasuries, which means this topic has less of an impact on the region currently.
However, Carroll believes that if equity collateral does get approval in the US, then it could become a more significant topic of discussion.
She has found that lenders are in two minds about ESG in terms of non-cash collateral, with some lenders applying ESG criteria to their acceptable collateral schedules through restrictions or exclusion lists consistent with their portfolio’s investment guidelines.
Whereas other lenders take the view that collateral is used for credit risk management and maintain broader and more liquid collateral guidelines, recognising that an overly narrow collateral profile could introduce risk to their programme.
Representing Standard Chartered, a bank which has recently entered the securities lending industry in the US, global head of securities lending Sunil Daswani emphasises that every client defines ESG differently and they are responsible for setting their own ESG policy. He predicts an increase in customisation requirements within securities lending going forward and, therefore, requirements of segregation with clients’ accounts will rise.
Moving the discussion forward, the panel analysed the possibility of ESG screening for cash collateral issuers.
Currently, the industry occasionally sees clients checking that their cash is being invested in an ESG-compliant portfolio, notes Carroll, who adds that it will be dependent on a firm’s ESG policy, which is becoming an increasingly significant factor for lenders and entities overall.
Speaking on the current position of ESG, Standard Chartered’s Daswani highlights the varying regional differences in ESG priorities. He says: “There are regional differences that must be considered, it is not just of the domicile of the lender but of the proxy voting practices in markets and regions. For example, annual general meetings (AGMs) and extraordinary general meetings (EGMs) are predicted by lenders in order to recall the stock for voting purposes in some markets on EMEA as the dates change each year, and in APAC they are not even necessarily known till after they have happened.”
Daswani explains how as investors move away from non-ESG compliant to ESG compliant investments, arguably, they do not need to vote as much going forward as they have in the past. This is because they have made the correct investment decisions at the outset that comply with the ESG principles they wish to achieve.
