Deloitte: Compatibility of securities lending and responsible investment strategies

It is commonly accepted in the financial academic literature that securities lending has an essential role in maintaining healthy and well-functioning capital markets while providing a large number of benefits to asset owners. However, as securities lending is often linked with short selling, its use by funds promoting an Environmental, Social and Governance (ESG) approach or responsible investment may be questioned. The objective of this paper is to summarise the views from public studies, academic research, regulatory texts and good practices on how securities lending can be compliant with a responsible investment strategy.

On one hand, securities lending is viewed by academic authors as a secured way to earn incremental revenues and bolster performance for lenders while at the same time being a useful tool in borrowers’ daily operations. In addition, academic papers as well as the International Organisation of Securities Commissions (IOSCO) highlight that securities lending contributes to effective liquidity and price discovery in financial markets, reduces volatility and costs for end-investors and is not detrimental to long-term value.

On the other hand, investors are increasingly looking at ways to integrate sustainable considerations in their portfolio strategies and apply responsible approaches. However, although the integration of responsible criteria in investment strategies is becoming mainstream, such approaches seem to preclude the practice of securities lending. Questions have been raised in this context about how securities lending aligns with responsible investing. Opponents of the practice argue that securities lending activities are not compatible with sustainable investment, shareholder stewardship and long-term engagement. This paper deals with how this commonly used practice impacts sustainable objectives. The extensive literature analysis in this memo shows that there is no evidence which suggests that securities lending could detract from sustainable investment strategies.

The full paper is available at https://www2.deloitte.com/content/dam/Deloitte/fr/Documents/risk/Publications/deloitte-securities-lending-and-responsible-investment.pdf

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