HSBC to relaunch ETF lending programme, excluding ESG funds
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HSBC to relaunch ETF lending programme, excluding ESG funds 18 February 2021UK Reporter: Drew Nicol
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HSBC Global Asset Management has become the latest firm to bar its exchange-traded funds (ETFs) that track sustainable indices from lending their assets.
From 1 March, the asset manager is set to relaunch a securities lending programme for 25 ETFs but will exclude all seven of its sustainable equity ETFs amid concerns it would not comply with HSBC’s overall environmental, social and governance (ESG) policy.
Across all funds, HSBC Securities Services, acting as agent lender, will gain access to underlying securities across 38 equity and fixed income markets worth more than £2 billion.
The list of funds due to begin lending includes those tracking broad highly-liquid indices as well as several focused on emerging markets, Latin America or Asia Pacific, which are likely to generate the highest revenue.
HSBC Global Asset Management previously operated a lending programme until December 2013, upon which it "paused" the programme "due to the economic situation at the time and following discussions with clients".
The move came shortly after new rules were introduced in Europe requiring asset managers to pass all profits from lending back to underlying investors, less fees and costs for running the side business.
A HSBC spokesperson says the decision to restart the programme now reflects the “evolving global financial landscape with deleveraging and regulation changes”.
“After careful review and taking into consideration the growth and focus of our ETF business, we feel it is the right time to begin this programme to further help our clients on their investment journey,” the spokesperson explains.
Under the new programme, ESG ETF will not lend their assets until the “relevant framework” is in place “to ensure collateral and processes complement the ESG investment solutions and are aligned with the sustainable policy of the funds and the stewardship programme of HSBC Asset Management”.
HSBC says there are currently no plans to create such a framework at the moment.
The exclusion of the ESG ETFs from the lending pool collectively only represents £285 million in assets under management (AUM) and so are unlikely to cause much of a ripple.
The funds range from the humble one-year-old HSBC UK Sustainable Equity UCITS ETF — which tracks the FTSE UK ESG Low Carbon Select index and accounts for £3 million AUM — through to the HSBC USA Sustainable Equity UCITS ETF USD (£118 million AUM) tracking the FTSE USA ESG Low Carbon Select index.
This last index is mostly made up of the world’s largest financial institutions and technology providers and topped-up with constituents from the consumer goods and services sector such as Nestlé.
This compares to the HSBC MSCI World UCITS ETF (£1.87 billion AUM) and the HSBC Multi Factor Worldwide Equity UCITS ETF (£871 AUM), which will both begin lending next month.
Funds with relatively small AUM are sometimes considered to be not worth the hassle of onboarding into a lending programme but HSBC underscores that in this instance the decision to not include them was purely an ESG-driven call.
For sustainably-minded investors, the exclusion means they will not benefit from this additional revenue stream at a time when ESG assets are predicted to bring lucrative returns.
The programme will return 75 per cent of lending revenue to investors, with 25 per cent used to cover HSBC Securities Services fees as the agent lender and a further 10 per cent allocated to HSBC Investment Funds Luxembourg which will act as an ETF Management Company.
The typical collateral profile will consist of EUR, USD and GBP cash or high-quality and liquid equities and fixed income securities.
Where possible, any cash collateral will be invested into HSBC Asset Management’s money market funds or, alternatively, in segregated accounts.
Speaking on SFT’s recent APAC-focused roundtable, Brian Leung, regional trading head for APAC, agency securities lending at Deutsche Bank, said: “ESG will be driving appetite and sentiment for sustainability investors so one should expect more opportunities to lend and borrow in highly-rated ESG names.”
The sustainable passive fund market has bloomed over the past year and soon the cumulative impact of their inability to lend will lead to a reckoning for the securities finance community which must prove its ESG credentials to those outside the market.
ESG ETFs chalked-up an “incredible” 223 per cent growth over 2020 achieving a new record of $189 billion AUM, according to TrackInsight.
ESG ETFs captured $97 billion of inflows last year and nearly 200 new funds were brought to market during the same period, with ESG set to become “a key battleground” for issuers over 2021, the global ETF analysis platform states.
HSBC’s decision follows that of DWS, a German asset manager majority-owned by Deutsche Bank, which closed the lending programme of one of its long-standing ETFs in December as part of its switch from tracking a traditional FTSE index to an ESG-friendly one.
Similar to HSBC’s concerns, DWS passive product specialist structurer Zeb Saeed told SFT at the time that the need for restrictive collateral parameters and regular recalls creates “a number of other challenges and alters the economics of the securities lending function to the extent that it effectively erodes much of the potential revenue from lending”.
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