Industry body highlights ESG ‘ramifications’ as securities lending market hits €19trn

International Securities Lending Association issues annual market report

The International Securities Lending Association (ISLA), a body that represents all the players within the value chain, has reported that ESG investing has clear ramifications for the burgeoning global lending markets.

ISLA’s annual market report published last week highlights that securities being made available by institutional investors within lending programs grew from €16.6trn at the end of last year to €19.6trn trillion at the half year end. More than 67% of those securities are equities.

Back in May, ISLA’s CEO Andrew Dyson gave an update to the Bank of England’s Securities Lending Committee.

According to the BOE minutes, ISLA set out four current drivers of the securities lending market, one of them being the momentum from the ESG agenda.

“This brings about the question of whether lending can sit comfortably alongside a good corporate governance structure,” the minutes reported.

ISLA’s annual report stated that ESG driven funds can present “challenges around collateral acceptability and the governance requirements that are enshrined within this [ESG] ethos.”

Such a challenge, ISLA reported, demands that institutional investors have a policy around their governance as well as their securities lending programmes.

“It is critical that investors aspire to discharge their governance obligations in an appropriate and responsible way. To do this, it will be important that institutional investors have fully developed approaches to both governance and lending,” ISLA reported.

The body added: “Both can exist, and ISLA is working hard with key industry stakeholders to develop best practice and market codes of conduct to provide viable governance around these issues.”ISLA’s membership includes beneficial owners such as PGGM, MN Services and Swiss Re.

Dyson told RI in the past that securities lending should not be a barrier to good corporate governance.

In the UK, a new stewardship code will be most likely published in October that will show the approach the Financial Reporting Council has taken on the issue. Its guidance currently just reads: “Institutional investors should disclose their approach to stock lending and recalling lent stock.”

Across Europe, the Shareholder Rights Directive II, which effectively introduced a disperse stewardship code within its provisions, also touches upon securities lending.

It requires asset managers to disclose their policy on securities lending and how it is applied to fulfil engagement activities and AGM voting.

In the Netherlands, the July 2018 stewardship code has gone further, mandating asset owners and managers to recall lent shares if significant votes are coming up in the ballot of an AGM. It also mandates them to abstain if their short positions are larger than their long positions.

Across the pond the Investor Advisory Committee of the US Securities and Exchange Commission has this summer discussed studying in more depth how securities lending affects voting rights and results.

Apart from voting issues, other concerns have been raised. Research by Better Finance, a European federation of investors and financial services users, has found that asset managers pocket from a third to nearly half of the revenues generated from securities lending.

That is despite EU rules require that all income from securities lending must be returned to the funds and not generate surplus income for the fund management company, Better Finance said.