The Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) today launched the Global Framework for ESG and Securities Lending (GFESL). Presented in partnership by the two industry associations, the GFESL aims to provide a starting point in helping institutional investors apply Environmental, Social and Governance principles to their securities lending programmes in alignment with their organisational ESG policies.
The GFESL provides standardised options, essential background and key considerations across the six main touchpoints between securities finance and ESG – including voting rights, transparency in the lending chain and lending over dividend record dates – as well as suggestions on best practice in each case.
This first edition of the GFESL offers practical and technical guidance to institutional investors or beneficial owners in particular, but subsequent iterations are expected to focus more on the relevance of ESG to other stakeholders in securities lending, such as exchanges and regulators.
Key best practice recommendations
Among the best practice recommendations, the GFESL suggests that institutional investors that lend securities should consider:
- Voting rights:Assessing or developing a policy for recalling loaned securities based on ESG considerations in their proxy voting framework; identifying the types of shareholder resolutions on which they want to vote by company and by issue.
- Transparency in the lending chain: Implementing effective minimum standards that reflect their corporate-level sustainability framework; for example, applying an ESG lens to selecting direct counterparties.
- Collateral and cash reinvestment: Applying the same ESG standards to the non-cash collateral they are prepared to accept when they lend securities as those that they apply to their investment portfolio.
- Lending over record date: Establishing a clear policy on lending securities over dividend record dates and communicating this with agent lenders; monitoring counterparty exposure in order to identify unusual activity.
- The short side of the market: Identifying the areas in which they see potential for a conflict between facilitating participation in the short side of the market and their corporate ESG commitments; developing a policy to govern the facilitation of participation in short-selling that includes specific guidance on the circumstances under which they would limit lending or decline to lend.
Global collaboration
“Integrating ESG factors into securities lending is increasingly important to all market participants, reflecting the broader shift towards sustainable financial markets,” said Paul Solway, Director and Communications Officer at PASLA. “PASLA and our partners at RMA believe it is essential that the market has a shared understanding of how ESG and securities lending intersect, as well as a common decision-making framework for managing these touchpoints. We are proud to have made a start in this process with the first iteration of the GFSEL and look forward to building on it in the future.”
“Over the last year or so, the industry has established that ESG and securities lending are complementary, not conflicting,” said Fran Garritt, Director of Securities Lending, Market Risk, and Credit Risk at RMA. “The GFESL moves the agenda on to how we actually apply ESG principles in our market, providing valuable technical guidance to beneficial owners in particular. We are proud to collaborate with PASLA on this important step forward for the global securities lending industry. We look forward to working with all industry bodies and stakeholders to refine the GFESL in the future, so that it reflects evolving views about best practice as well as taking into account new research and insights.”
The International Securities Lending Association (ISLA) has also endorsed the GFESL. “We are delighted to see the publication of these ESG guidelines for the investment community from PASLA and the RMA,” said Andrew Dyson, CEO at ISLA. “Recognising that regional variances especially from a regulatory perspective will drive different outcomes, at least in the short term, it is vital that associations lead the way on defining best practice to fully align securities lending within an ESG investment framework across their various regions. We very much look forward to further collaboration and cooperation between our respective members and organisations in and around this important area.”