[ I N - D E P T H
they work with beneficial owners and
their securities lending programmes.
"The challenge is that ESG is not
uniform, and each client has their own
definition and set of best practices,”
explains Kelly. “For custodians, we have
to understand how to support collateral
sets that align with the underlying
assets which will be loaned out, and
determining the collateral conforms with
client principles. This can cause fractured
collateral sets and lead to a degree of
inefficiency because it is impractical to
have a collateral set for every client that
has their own ESG definition.”
GPIF clearly felt that securities lending
is counter-productive to their ESG goals,
that by lending out their portfolio it may
prevent them from exercising their proxy
rights and ability to directly influence
corporate governance.
Yet even for those firms that are
extremely ethical and have deeply-rooted
ESG principles, it cannot be guaranteed
all beneficial owners will have the same
outlook. For example, a beneficial owner
in the Middle East may have a different
view towards ESG than that a European
beneficial owner. The myriad of ESG
outlooks and definitions will not only
have an impact on investing but also
securities lending.
“Most lending programmes are certainly
no longer going to be ‘one size fits all’.
ESG will touch all aspects of a trade
including whether the initial borrower
is an ‘ESG appropriate’ counterparty,”
adds Chessum. “I would also expect
to see more restrictions regarding the
acceptance of certain types of collateral.
Due to the differing interpretations of
what ESG means to each investor, greater
individual programme divergences will
become the norm given the increased
prominence of the ESG element of the
fund’s overall approach to investing.”
According to BNY Mellon’s Kelly,
beneficial owners will also have to weigh
up the benefits of maximising their
securities lending, and then overlaying
ESG principles and identifying the
effect that has on securities lending
opportunities.
During a time where returns are low in
an increasingly competitive world, having
a limited securities lending programme
could prove to be a detriment to beneficial
owners.
“If they [beneficial owners] become too
selective, it may impact the contribution
“If they
[beneficial
owners]
become too
selective, it
may impact the
contribution of
ESG strategies
to the overall
market place.”
BILL KELLY, HEAD OF AGENCY
SECURITIES FINANCE, BNY MELLON
|
S E C U R I T I E S
L E N D I N G ]
of ESG strategies to the overall market
place. But it depends on the liquidity of
securities lending and how quickly ESG
principles will be adopted and translated
into the marketplace. I think this will take
some time,” Kelly explains.
In addition, as ESG factors play an
even greater role in investment choices,
there could also be a change in securities
lending strategies.
"What we might see is a shift in strategy
towards lending a small amount of
securities for a higher fee, as opposed
to a volume lending strategy where you
maximise everything in your portfolio,”
says BBH’s Haberlin. “It is practically
easier to recall securities on loan for
a vote in an intrinsic-value lending
programme.”
With all these factors in mind,
custodians and agent lenders need to
be more flexible in what they offer to
beneficial owners.
“We want to be flexible and sit with a
whole range of beneficial owners and
cater to a whole range of options. Some
may want to lend and others want to
restrict on collateral, others may want
to be more quantitative and restrict on
a rotational basis,” adds State Street’s
Lawton.
The potential domino effect of GPIF’s
decision to withdraw from lending its
foreign equity portfolio will probably
go unfounded. After all, the pension
fund giant did not shut the door
completely on its securities lending
programme, stating: “The stock lending
scheme may be reconsidered in the
future if improvements are made to
enhance transparency and address the
inconsistencies cited.” GPIF also said that
the suspension to the programme did not
include the fund’s fixed income securities,
which it continues to lend.
In addition, industry and regulatory
initiatives are helping to increase
transparency in the securities lending
market, and the work being carried out
by ISLA to foster sustainable financing
principles could also make a significant
impact.
It is clear ESG will be a dominant factor
in all investment areas in the years to
come. But without agreed standards and
definitions, custodians and agent lenders
will have to come up with flexible options
to handle a magnitude of diverging
securities lending programmes from
beneficial owners.
Spring 2020
globalcustodian.com
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