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GPIF stated at the time: “The current
stock lending scheme lacks transparency
in terms of who is the ultimate borrower
and for what purpose they are borrowing
the stock. In light of this situation, GPIF
has decided to suspend stock lending
until further notice.”
The decision was part of GPIF’s efforts
to establish itself as an ESG-focused
investor. When a stock is out on loan, the
voting rights go with it, which means
the asset owner cannot engage with its
portfolio companies.
Given GPIF’s status as one of the
largest beneficial owners, its decision
sent notable shockwaves throughout the
industry, and numerous articles in the
Financial Times subsequently appeared
in support or in opposition to GPIF’s
decision.
One article by Charles Plowden, a joint
senior partner at UK asset manager Baillie
Gifford, said: “GPIF’s very welcome
leadership here highlights an important
principle of good governance – that
ownership brings both a responsibility
and an opportunity to help create value
rather than destroy it. The purpose of
long-term investors, who are a rare breed
in any case, should be to help companies
to realise their full potential through
active engagement and the exercise of
shareholder votes.
“GPIF should be applauded for taking
the long-term and principled view of its
responsibilities.”
Meanwhile, another article by Travis
Lundy, an independent situations analyst
at Ballingal Investment Advisors in Hong
Kong, explained how GPIF’s move is not
productive to its various efforts across
ESG and corporate stewardship. “Lending
shares – even for free – is a great way
to get more active parties to the table,”
Lundy wrote.
So what impact has GPIF’s decision
had on the industry? Clearly, the fund
is attempting to use its size to promote
more sustainable markets while also
establishing itself as an ESG-conscious
global financial institution.
It is not the only large player reviewing
equity lending within a governance
context. In October 2018, Korea’s National
Pension Service (NPS) announced it
would halt domestic equity lending
to short sellers while it analysed the
correlation between local share lending
and short selling. Furthermore, according
to reports, French asset manager AXA
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Global Custodian
Spring 2020
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Investment Managers, has had similar
conversations around ESG and their
securities lending programme.
“GPIF should
be applauded
for taking the
long-term and
principled
view of its
responsibilities.”
CHARLES PLOWDEN, JOINT SENIOR
PARTNER, BAILLIE GIFFORD
Voting rights
GPIF’s concern over the ability to recall a
stock on loan in order to exercise voting
rights has made some beneficial owners
cautious that by lending out securities,
the legal transfer of ownership goes to
the borrower, and therefore they lose the
ability to engage in voting.
Norges Bank Investment Management
– which oversees Norway’s largest
sovereign wealth fund managing over $1
trillion in assets – has affirmed that its
responsibility as a long-term shareholder
is to be an active participant in corporate
governance, and as such, uses its
influence in the securities lending market
to make an impact.
“As an organisation, we seek to ensure
that our input to corporate governance
remains relevant and in accordance with
our responsibilities; this can and does
involve restricting the supply of shares for
stock lending as appropriate,” it said in a
report in 2016.
While this may be the outcome in
‘hard-term’ loan programmes, which
contractually removes the right of the
lender to recall securities, many ‘soft-
term’ loans and overnight rolling lending
arrangements can easily address this
issue. As a result, there are other ways
for beneficial owners to exercise their
governance responsibilities, in addition to
restricting the supply of stock lending.
“Every beneficial owner should have
clear policies in place for recalling
stocks, as well as for tax, transparency
and collateral,” says Matthew Chessum,
investment director, securities lending,
Aberdeen Standard Investments.
These recalls have become an
established element of larger agency
lending programmes, and are supported
by their Global Master Securities Lending
Agreements (GMSLA). Keith Haberlin,
head of the global securities lending
group, investor services, at Brown
Brothers Harriman (BBH), explains the
firm has been working with their asset
owner clients to give them the ability to
recall securities and exercise their voting
rights without having to restrict the
amount on loan.
“GPIF is attempting to use its
influence as a large investor to
promote more sustainable markets.