Sec lending management key to better ESG

Managing securities lending policies in line with ESG goals, rather than halting them completely, should result in better outcomes for shareholders, research suggests.

In recent months, asset owners had been quizzing fund firms over whether the practice of securities lending erodes long-term sustainability efforts. This followed a decision by Japan’s Government Pension Investment Fund (GPIF)  to cease securities lending in December 2019.

However, research from EY and the Pan Asia Securities Lending Association (PASLA) suggests that the practice of securities lending may actually enhance ESG efforts, if the two are co-ordinated and managed simultaneously.

“Short selling and securities lending can also be a mechanism for influencing change in corporate ESG policies and, in our view, for the better,” explained Stuart Jones, chairman of PASLA.

The survey of PASLA members found that 89% of respondents said securities lending was indeed compatible with ESG programmes, when specific measures are in place.

According to the EY/PASLA survey, 44% of respondents don’t yet consider ESG factors in either their securities lending, financing or collateral programmes, while just 37% said they did so over all three programmes.

“A lot of people, but certainly not all, have not considered what ESG needs to look like when lending securities,” PASLA’s Jones said in a statement accompanying the findings. The industry body is currently working across the industry to design a best practice guide.

The research highlights a need for precise stock lending management, if ESG aspirations are to be met. Minerva currently offers an ESG stock lending management solution, which allows asset owners to know when shares need to be returned, to protect their voting rights, for example.

The need for such solutions was clear from the research, with 66% of respondents saying they proactively consider recalling shares ahead of proxy votes – many due to requests from their clients.

Concerns that firms may not be compliant with ESG principles has previously spooked some, according to the research, with 81% saying they had previously considered suspending lending.

Despite this, 68% of those surveyed by PASLA said they did not have a dedicated ESG team or specialist within their securities lending business.

The securities lending market remains a huge revenue generator for asset managers. According to IHS Markit figures, cited by Reuters, fund groups around the world earned in excess of $10bn last year from securities lending operations.