ESG heralds a new age of principles over tradition
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ESG heralds a new age of principles over tradition 14 February 2020London Reporter: Drew Nicol
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The introduction of environmental, social and governance (ESG) principles into the securities finance market requires the reconciliation of the traditionally rules-based infrastructure with a new principles-based ethos, warns ISLA’s CEO.
In his latest Reflections of the CEO post, Andrew Dyson, notes that an “interesting natural tension” exists between the legacy of regulators primarily acting in a reactive way and the emergence of ‘sustainable finance’, which has a pro-active element.
“Reconciling these quite different worlds will present both organisational and cultural challenges across our markets and beyond,” he writes.
Speaking on an ESG-focused panel at the recent GFF Summit in Luxembourg, Dyson also highlighted that the shift from regulators acting as a risk-mitigating force that reacts to events like the 2008 financial crisis to becoming a driver of industry behaviour without such a justification would be a significant departure from their traditional role.
Nonetheless, Dyson notes in his latest blog post that this week saw the “bold intervention” by the European Securities and Markets Authority (ESMA) with the publication of its Sustainable Finance Strategy.
The strategy crystallises ESMA’s emphasis on putting ESG front-and-centre in its activities. Its key priorities will be around transparency obligations, risk analysis on green bonds, ESG investing, a convergence of national supervisory practices on ESG factors, taxonomy, and supervision.
The International Securities Lending Association (ISLA) has also been leading the charge in tackling the varies challenges that come with ESG, which range from complications to beneficial owners’ collateral profiles to fostering outright hostility to the securities lending market caused by its association with short selling.
The association’s newly formed Council for Sustainable Finance met for the first time recently and has now begun work on a solution to what many perceive to be the most significant stumbling block facing the drive towards great adoption of sustainable finance – the lack of consistency or universal market agreement in what is considered ESG friendly or not.
As part of its multi-pronged strategy to assist its members through the thorny ESG maze, the association has also partnered with Climate Action to support the Sustainable Investment Forum Europe 2020.
The event in March will bring together 400 policymakers, investors and financial institutions in the sustainable investment space to try and a handle on the issue of ESG.
ISLA’s emphasis on ESG is in part driven by the fact that securities lending industry is more vulnerable than most sectors to the impact of ESG entering the financial market’s lexicon.
In December 2019, Japan’s Government Pension Investment Fund (GPIF) revealed it would no longer lend out its foreign equity assets as it considers the practice to be too opaque and incompatible with its responsibilities as a long-term investor.
GPIF has around $1,452.5 billion in assets under management, of which $381 billion are foreign equities (as of March 2019), making it the world’s largest pension fund.
Although the departure of GPIF from the lending pool has not significantly altered the dynamic of the oversupplied market, the announcement that the move was driven by the belief lending and ESG were incompatible did raise concerns that other asset managers may also be inspired to reevaluate their own lending programmes.
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