Environmental, social and governance (ESG) investment funds are on the rise, and with them the importance of these funds in securities lending. Using newly collected data, we document the securities lending returns of ESG funds and how they are similar or dissimilar from non-ESG funds in the lending market.
The report finds that ESG funds can safely participate in securities lending, but should take care to manage the process both upstream and downstream to ensure that ESG principles are maintained throughout the program. This requires establishing procedures that document the fund’s decisions to lend or not lend on occasion as well as managing associated collateral activity. A successful ESG securities lending program will require both active fund engagement and support from capable service providers.
The funds in our sample manage over $73 billion in assets, with 89% participating in lending programs by AUM and 11% not participating. Most lending funds tend to be part of complexes that participate in securities lending for their other products; ESG funds are included in the program as a normal part of business. There were three fund complexes that did not participate in securities lending at all. Other non-lending funds had isolated reasons for not lending, for example bond funds that would not generate much income based on their assets or complexes that gave discretion to lend or not lend to portfolio managers.
This report should be read by institutional investors and fund managers in the ESG space to better understand ESG fund participation in securities lending, including data on engagement and why lending ESGs may be different than other funds. This may translate into expectations of different returns for investors and fund managers. The report may also be useful for service providers in the securities lending market including agent lenders, prime brokers and technology vendors.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/esg-funds-in-securities-lending-a-statistical-and-program-analysis/
For non-subscribers, more information is available here.