ESG and securities lending: Asia charts a course towards alignment
Asset owners and managers across Asia Pacific are becoming increasingly focused on managing their securities lending activity in a way that is consistent with the ESG principles that guide their investment decisions.
While growing, securities lending by buy-side institutions in Asia is not yet as widespread as it is among their peers in North America and Europe. But, given the momentum behind sustainable investment globally in the wake of Covid-19, there is a growing realisation among Asian investors that they should start considering how ESG and securities lending intersect – and how to manage the ESG variables in lending programmes.
This emerging desire for more clearly defined options and standards to guide participants in the region initially became clear as a result of a PASLA survey released in May 2020.
Following this, PASLA collaborated with AsianInvestor to gather insights from more than 150 senior industry executives via a survey conducted in October and November 2020. Over 100 of these individuals represented a total of 65 asset owners and investment management firms across the region. The estimated assets under management (AUM) of those buy-side respondents with a securities lending programme (roughly one-third of the total) is just over $2 trillion, while those institutions without a programme have a combined estimated AUM of roughly $1.9 trillion.
Several consistent themes emerged from this survey along with follow-on discussions with selected market participants:
- Only around one-third of buy-side respondents have established a securities lending programme, suggesting that a majority of Asian investors do not lend their securities at all.
- Investors are only just beginning to consider how ESG principles might be applied to lending programmes. One of the main obstacles to more consistent integration remains the lack of standardised data and a common understanding of what ESG means in a capital markets context.
- Portfolio managers wield the greatest influence when it comes to decision-making on ESG factors in securities lending programmes – ahead of professionals from the ESG and governance teams as well as those from the lending and risk management functions.
- Being able to exercise voting rights, along with the need for transparency in the lending chain, are the two most prominent factors for investors when they consider the relationship between ESG and securities lending.
- To exercise voting rights in line with ESG considerations, respondents said a best-practice approach would require a mechanism for flexibly and efficiently enforcing the recall of loaned stock. At the same time, due diligence to assess the voting intentions of the borrower is important for asset owners and managers.
- To ensure transparency, the vast majority of respondents believe asset owners should have visibility over the entire lending chain for their securities. Around two-thirds overall said an asset owner should be accountable for how its securities are used down the lending chain.
- When it comes to participation in the short side of the market as a result of securities lending, around 85% of respondents at asset owners and managers agree that certain restrictions should be in place to address their concerns over the compatibility of ESG principles with securities lending. This rises to 94% among investors that already have a securities lending programme.
- When applying ESG principles to participation in the short side of the market, the clear preference among all respondents – whether or not they have lending programmes – is to restrict the lending of securities in which the beneficial owner has significant shareholdings.