ISDA’s Andy Dyson encourages engagement with regulators on ESG and securities lending

Reflections of the CEO, 5 March 2021

Over the past few weeks, I have noted two clear themes that raise questions about the ability of ESG-led investment strategies to reach their full potential.

First, we have seen several institutional investors deciding to either suspend lending of their ESG portfolios, or withdraw them completely from lending programmes. Recognising that securities lending is a discretionary activity, it is often easier to say ‘no’ when confronted with something that looks different and arrives with some regulatory uncertainty circling around it. This is exactly the situation we are facing here in Europe, where a lack of clarity in and around the Sustainable Finance Disclosure Regulation (SFDR)probably leaves all of us with more questions than answers. Therefore, I can understand that some feel that it might be expedient to stand away from lending these securities, at least in the short term. Reasons given, appear to reference the compatibility between ESG and securities lending. We firmly believe that a well-run and prudentially managed securities lending programme can happily run alongside an ESG investment mandate.

The second theme I wanted to explore, is the role of securities lending in the context of ESG itself, and how it should be seen through a sustainable lens. As we look at the developing ESG investment landscape, we are seeing substantial flows of assets into ESG funds. Recently, Morning Star reported that ESG funds took in some $350 billion in new investments in 2020, compared to $165 billion in 2019. This shift in investor sentiment tells us that securities lending markets must respond to these trends with creative and at times novel solutions to support their development. We have already discussed the important part that securities lending can play in supporting the development of the capital markets ecosystem more broadly, but some recent commentary would seem to put lending at the very centre of this debate. Whilst not wanting to underplay the importance of our markets, securities lending has itself become the story. I would argue that this is not the right way to view the challenges that we face at this time, or as we grapple with the increasingly complex array of regulation and policy guidance in this area. Much has been said and written about whether securities lending should be classified as a so-called ‘green’ product that supports sustainable objectives. The absence of any credible definitions from the regulatory community does not help this debate, and indeed I have seen some various institutions attempting to comply with regulation, possibly inadvertently classifying securities lending as a sustainable product. I am not sure it is wise, at this stage, to make assumptions, but rather proactively engage with regulatory authorities to aid their understanding of the product.

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