The integration of ESG considerations in the financial market goes beyond ethical concerns and has become a critical aspect of influencing investment decisions, risk management and overall market dynamics, according to Hitesh Harduth, head of securities lending at Standard Bank.
At this year’s South African Securities Lending Association (SASLA) conference in Cape Town, market participants gathered to discuss how ESG is impacting the financial markets.
The idea of responsible investing is not a new concept. In the 1960s, investors were already thinking about the ethical and social implications of their investments.
The recent shift in the ESG landscape, highlighted by Teboho Makhabane, head of ESG and Impact at Sanlam Investments, emphasises the market's movement towards funding sustainable development goal (SDG)-related opportunities, aligning with the pillars set by the SDGs to engage the private sector in addressing societal and environmental challenges.
For Waseem Thokan, head of ESG and research at Peresec, ESG states that the nature of the economy and human society creates risks around continuity and sustainability. “To what extent can participants ensure that those long-term systemic risks are managed in a manner that humanity becomes sustainable and its development becomes continuous or self-reinforcing?”, he asked.
This developing space has produced two main categories of products that are designed to support sustainable financing; these are general purpose and use of proceeds.
General purpose can be used for financing for any purpose. The legal documentation will specify the ESG commitments to be made by the borrower or issuer and the pricing margin adjustment mechanisms will link to the achievement or non-achievement of these targets.
For use of proceeds, this relates to financing specific green, social or sustainable projects. Participants track the use of proceeds and ensure that there is a positive impact linked to the financing that is being provided.
Anneke Lund, executive for sustainable finance at Standard Bank, highlighted that sustainable finance can be applied to any form of financing, whether it be long- or short-term financing, with the requirement to align with market principles set by the Loan Market Association and the International Capital Market Association.
She added: “The sustainable finance market initially developed within corporate term funding, but now we see them being applied to companies’ overdrafts, which could be linked to the firm’s commitments around social and green activity or financing specific green or social assets. This will eventually become the mainstream way of raising financing.”
The Global Alliance of Securities Lending Associations (GASLA) provides a single voice across global securities lending markets, advocating for transparent and standardised practices that support efficient, liquid and sustainable capital markets, including considerations of ESG factors.
Through collaboration, GASLA aims to enable positive and impactful engagement with stakeholders, including regulators, policymakers and standard-setting bodies across all regions.
According to Michael Wright, SASLA chairman and a member of GASLA, the association has been working with a broad range of securities lending market participants to drive best practice, to support integration of corporate governance policies around voting, stewardship and active ownership.
GASLA advocates that a lenders’ ability to fulfil their stewardship responsibilities over their underlying investments should not be impeded by their participation in securities lending.
To help market participants combat issues forming from the use of ESG, GASLA has created the Global Framework for ESG and Securities Lending (GFESL), a framework for lenders to see how they can evaluate their securities lending programmes in the context of their ESG policies.
