Broadridge on securities lending recalls and ESG

The Green Roof
Martin Walker
Head of Product Management, SFCM

Mike Lambert
Head of Securities Lending, SFCM

Broadridge

Generating and managing recalls is one of the fundamental processes of the securities lending business. Securities lending transactions are normally transacted on an ‘open’ basis i.e. there is no fixed term to the transaction. The end of a transaction is generally dependent on either the borrower determining the securities are no longer required, generating a return or a lender determining they need the lent securities to be returned and generating a recall.

Though one of the most publicised aspects of ESG is the environmental dimension, the governance aspect is equally, if not more important. In general, good corporate governance policies aim to avoid the problems that can arise from the separation of ownership and control in public companies, the well-known ‘agency problem’. Over the past 18 months of frothy and volatile markets, it has sometimes been very hard to see a direct relationship between good corporate governance and shareholder returns. However, there is a solid body of research going back decades that demonstrates that firms where there are clear mechanisms to monitor and hold management accountable, generate higher shareholder returns. Not to mention reduce the risk of general mismanagement or even outright fraud.

One of the key measures of a buy side firms’ commitment to investing in firms with good corporate governance is corporate voting. Voting on issues such as the constitution of the board and executive are vital to maintaining accountability. Corporate votes may also be on matters that impact other areas of ESG. Voting on matters related to diversity and inclusion, for instance, are important to social objectives of ESG. Feeding corporate voting data into an automated recalls process can improve both efficiency and firms voting records. Voting information can trigger either automatic recall of equities or flag loan trades as requiring a recall to allow a human to determine whether to make a recall. Using the right data provider allows an even more effective and targeted identification of the need for recalls. Data available includes information on the specific ESG objectives impacted by announced votes as well projected (but not yet announced votes) based on historical data.

It is likely the importance of voting rights as a motive for recalls will have an increasingly large impact, potentially leading to higher volumes of recalls in the future. Thus, putting more pressure on the industry to improve automation.

The full article is available at https://www.broadridge.com/article/the-green-roof

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