ISLA’s ESG council publishes first position paper 09 April 2020London Reporter: Natalie Turner
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The International Securities Lending Association’s (ISLA) newly-launched Council for Sustainable Finance (ICSF) has released its first 'position paper' to address the role of lending and short selling during periods of heightened volatility.
The PSSL is a voluntary rules framework aimed at promoting environmental, social and governance (ESG), sustainable development goals, and long-term thinking into securities lending activities.
Amid the current COVID-19 pandemic and the market disruption it has caused, the council has published a paper called ‘Making Sense of Sustainable Securities Lending & Short Selling During the COVID-19 Crisis’, which argues that securities lending and short selling are positive mechanisms as long as they conform with its PSSL framework.
ISLA says its membership base has already committed to adopting the PSSL, and that this crisis “should serve as an incentive to expedite the implementation of these principles globally”.
The association adds that by demonstrating a collective commitment to the sustainability agenda, “we can stimulate the market and increase investor confidence”.
The position paper also offers a comprehensive de-bunking of the effectiveness or appropriateness of applying bans on short selling as a way to mitigate downward pressure on equities markets.
The council argues that not only do these bans not achieve their desired aim, they, in fact, exacerbate market turmoil by removing hedging options, reducing overall liquidity and distorting price discovery.
Addressing the temporary short selling bans that have been implemented in several markets in Europe and Asia, ISCF states that “there is no evidence that the current short selling has led to stock prices falling in the context of the COVID-19 crisis”.
“Rather, investors have simply shed their holdings as a logical response to this growing threat," it adds. "We must also highlight that the current temporary bans were introduced at the peak of volatility.”
The council further notes that, although markets recovered, slightly, following the introduction of current bans in Europe, “this was just a respite and the decline resumed soon after”.
In a statement on its first position paper, the ISCF says that it is committed to working with regulators “to demonstrate the potential for PSSL to help with market recovery, strengthen global markets, encourage diversity and inclusion, and reinforce the overall sustainable finance agenda”.
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