It is clear that ESG has become an important factor in investment decision-making, but to what degree has it directly influenced the holdings of institutional investors and their engagement over proxy votes? What about the investment strategies of short sellers?
Our recent study examines the effect of ESG on the global equities lending market. By combining equities lending, ESG, and proxy vote data, we quantify the impact ESG has had on lending supply, short-selling demand, and institutional investor engagement.
Our findings suggest that ESG considerations are deeply embedded in the securities lending market and are growing in importance. Importantly, the analysis identifies ways in which institutional investors can balance the revenue earned through securities lending with the pursuit of their ESG objectives.
Key findings from our study:
1. ESG significantly impacts securities lending supply: A significant positive relationship exists between a company’s performance on ESG attributes and the shares available on the securities lending market.
2. Evidence of “Green Shorting”: Firms that perform poorly on material ESG attributes are associated with significantly higher fees and increased levels of borrowing demand, a proxy for short selling.
3. ESG influences institutional engagement: Trends in securities lending share recalls over proxy record dates suggest institutions engage more with companies with poor ESG characteristics.
4. Little evidence of “empty voting”: A concern cited by some beneficial owners; we find no evidence of borrowing securities to increase short-term influence over proxy votes.
The full paper is available at https://www.statestreet.com/content/dam/statestreet/documents/Articles/state-street-the-effect-of-esg-on-the-global-equities-lending-market.pdf