[ I N - D E P T H
“Some fund managers are doing
that to take in the risk-mitigating
effect of received collateral. If clients
are considering these additional
complexities to their in-house systems,
that should start to shed a light on how
people will approach the issue of SFTR
reporting. “Owning this reporting process
in-house can bring greater transparency
and aid ESG monitoring.”
Beneficial owners are also working
with their agent lenders to put in place
controls and monitoring tools that enables
them to track their securities-on-loan.
“Most participants have restriction
lists, and I would suggest that many asset
owners are now more informed about
what their securities are being used
for and who is borrowing them,” adds
Aberdeen Standard’s Chessum.
“If their programmes are being
monitored correctly, beneficial owners
should have the ability to see any trends
and patterns in their borrowing activity
from the information provided to them by
their agent lenders.”
The ‘G’ in securities lending
Large asset managers and beneficial
owners are only just beginning to realise
the influence they have on corporate
governance and sustainability, and
efforts are now underway to greater align
ESG values with the securities lending
practice.
In December, the International
Securities Lending Association (ISLA)
announced the formation of a new
Council for Sustainable Finance
(ICSF). The industry body has since
announced the member representatives
on its committee, which includes
representatives from Aberdeen Standard
Investments, Aviva Investors, BlackRock,
KBC Asset Management, NN Investment
Partners and PGGM.
ICSF aims to introduce wide-ranging
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S E C U R I T I E S
L E N D I N G ]
“I personally can’t consider
where a one-directional market
is good governance and not
going to create bubbles.”
ALEX LAWTON, HEAD OF SECURITIES FINANCE, EMEA, STATE STREET
solutions for sustainable securities
lending through the introduction of
new principles. Named the ‘Principles
for Sustainable Securities Lending’
(PSSL), they will include new voluntary
sustainable finance mechanism for
securities lending.
Beneficial owners are also taking
greater ownership over their governance
responsibilities, and applying these
principles to securities lending
programmes.
"The 'G' has always been relevant to
ESG – even though there are new aspects
to it. The industry has had the ability to
align their securities lending programmes
with the investment principles of the
client,” explains Bill Kelly, head of agency
securities finance, BNY Mellon.
“If they have a desire to be active with
particular annual general meetings, it is
not uncommon for a securities lending
programme to align with a pension fund
investment goals towards proxy voting.”
The move by GPIF begs the question
whether voting is the only way that
firms can exercise their governance
responsibilities. This is where short
selling has become an increasingly
topical. Some may say that short selling
is not good governance because of its
potential link with short-termism. GPIF’s
chief investment officer, Hiro Mizuno,
told the Financial Times in an interview:
“Every beneficial owners should
have clear policies in place for
recalling stocks, as well as for
tax, transparency and collateral.”
MATTHEW CHESSUM, INVESTMENT DIRECTOR, SECURITIES
LENDING, ABERDEEN STANDARD INVESTMENTS
“I never met a short seller who has a long-
term perspective.”
However, his comments are contrary to
many other views from beneficial owners,
industry commentators and regulators.
In December last year, the European
Securities and Markets Authority (ESMA)
issued a report analysing short selling
and securities lending, where it stated
the practice is key for price discovery and
market liquidity.
“There is a lot of empirical evidence that
talks about the ability to short sell creates
market dynamics that allows people to
express sentiment on a company, both
positively and negatively. That is a very
powerful thing – to say a particular
company is overvalued, and therefore
you can express that view, that is good
governance,” says Alex Lawton, head of
securities finance, EMEA, State Street.
“If you cannot express those views,
you have a one-directional market. I
personally can’t consider where a one-
directional market is good governance
and not going to create bubbles.”
Differing perspectives
Yet while there is general agreement
around the environment and sustainable
investing, the taxonomy on governance,
particularly within a securities lending
context, still greatly differs between
firms. There are still so many different
views on ESG and how it relates to their
investment decisions.
One firm may choose not to invest in a
company because of their ESG principles,
while another firm will invest in the
same company because they feel they
can influence it through voting rights.
The same applies to securities lending
and the types of collateral they take –
does the collateral received meet the
investment guidelines of the fund? These
challenges provide certain complications
to custodians and agent lenders over how
Spring 2020
globalcustodian.com
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