State Street paper offers perspective on the intersection of ESG and securities lending

Beyond Mechanics: The Intersection of Securities Lending and ESG Investing

Empirical evidence indicates that short selling, facilitated by securities lending, improves market efficiency and market liquidity. A holistic view of academic studies suggests that constraints on short selling can lead to overpricing. This alleviates concerns of short-termism stemming from time horizon misalignment
of short sellers with long-term ESG investors.

Leveraging empirical ESG and climate finance research, we know that investors are using material ESG metrics in their investment decisions to improve their risk and return profiles. An increasing number of lenders and some borrowers apply these characteristics when considering what they loan (borrow) and to whom.

We do not yet know the impact that short selling has on a company’s material ESG performance in the long term. New insights will come from studying the changing dynamics between lenders and borrowers and the potential impact on a company’s material ESG performance. Through systematic empirical research, we may find ways and opportunities for the securities lending market to evolve and potentially grow. We look forward to approaching these questions and continuing to apply a rigorous data-driven approach to understanding this space.

The full paper is available at https://www.statestreet.com/content/dam/statestreet/documents/Articles/SSA_ESG_SF_paper.pdf

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