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Principles for Sustainable Securities Lending launched by BlackRock, Aviva, PGGM, Aberdeen Standard

Investors say guidelines are ‘first attempt to resolve some of the conflict between securities lending and ESG’

BlackRock, PGGM, and Aberdeen Standard Investments were among a group that launched the Principles for Sustainable Securities Lending (PSSL) last week. 

Japan’s pension titan the Government Pension Investment Fund (GPIF) hit headlines back in December when it announced it was suspending its equities securities lending programme over concerns it conflicted with its stewardship aims.

The latest development sees the Principles emerge from the International Securities Lending Association (ISLA), via its Council for Sustainable Finance, which said the guidelines aim to have “a strong and clear impact on the social, governance and long-term thinking elements of sustainable securities lending”. 

The council’s Executive Committee is made up solely of investors and ISLA representatives. They are: 

  • Matthew Chessum, Aberdeen Standard’s Investment Director and specialist in securities lending, collateral management and money markets,

  • Mick Chadwick, Head of Securities Finance at Aviva Investors,

  • Stefan Kaiser, Managing Director and head of securities lending for BlackRock,

  • Andrew Dyson, CEO of ISLA,

  • Johan Verloo, KBC Asset Management’s, 

  • Roelof van der Struik, Investment Manager at PGGM,

  • Martin Aasly, Senior Portfolio Manager at NN Investment Partners, and

  • Senior Portfolio Manager at NN Investment Partners, Xavier Bouthors

The eight principles cover alignment, transparency, tax, voting, collateral, short selling, stakeholder involvement, and innovation. 

On voting, the Principles say: “Voting rights cannot be exercised by the beneficial owner if the underlying security has been lent to someone else. Borrowing securities for the purpose of using them for their voting rights is not acceptable market practice. All parties should have an ability to recall and/or restrict securities for a certain period from the lending programme.”

 "We need triparty collateral agents. We need the sell side. We need possibly hedge funds. We need to represent more than just the buy side, because everybody needs to be toeing the same line and moving in the same direction" – Matthew Chessum, Aberdeen Standard

In relation to short selling, it says: “We stress that covered short selling is beneficial to financial markets. It is part of the essential market mechanism that facilitates price discovery and liquidity. It also reduces the asymmetry in a market participant’s ability to express an opinion on the value of assets. Beneficial owners must not knowingly facilitate any form of manipulative market activity or abusive short selling. 

Aberdeen Standard’s Chessum told RI that the principles were a first attempt to “resolve some of the conflict between securities lending and ESG”, and that they would develop along with the wider ESG debate.

“When the ESG conversation kicked off, there was a certain amount of discussion that started questioning whether the two were mutually exclusive – whether a fund that was part of a ESG mandate should engage in securities lending,” he said. “Our opinion was always, yes, it should do, because as long as you've got the controls and the tight governance structure that most programmes already have in place, then a lot of the perceived conflicts between the two could be resolved.”

The council is chaired by academic Radek Stech, who founded the Sustainable Finance focused Law & Stakeholders network of Exeter Law School. 

Stech originally proposed the principles at the IMN’s 25th Annual Beneficial Owners International Securities Finance and Collateral Management Conference in September 2018, prompting a number of beneficial owners to get in touch with him. He then formed a high-level working group of the investors to develop the principles, which later partnered with International Securities Lending Association.

Ascertaining what progress members have made in implementing the PSSL will be “high on the agenda for each council meeting”, Stech told RI. 

These forums will also be an opportunity for members to share their experiences of PSSL implementation and learn from each other, with some of this information also forming part of the Annual Report on the State of Sustainable Securities Lending. 

Alongside the investors on the group are four partner organisations: the Law & Stakeholders network of Exeter Law School; the World Pensions Council; wealth-management advisor Financial Decisions; and the Pan Asia Securities Lending Association.

Chessum said going forward, the group will need to become more representative of the securities lending market as a whole: “We need triparty collateral agents. We need the sell side. We need possibly hedge funds. We need to represent more than just the buy side, because everybody needs to be toeing the same line and moving in the same direction.”