RMA and State Street release ESG data white paper
04 June 2021 US
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The Risk Management Association (RMA) and State Street Associates (SSA) have authored a white paper highlighting best practices to help agent lenders and asset owners integrate sustainable investing considerations into a securities lending programme.
Integrating ESG Considerations into Securities Lending, authored by the RMA’s Financial Technology and Automation Committee and published on Wednesday, examines the different attributes of environmental, social and governance (ESG) data.
The paper also defines ESG in the context of securities lending and lays out best practices to facilitate shareholder activism in a securities lending programme, as well as potential non-cash and cash collateral solutions for sustainable lending.
SSA lead securities finance researcher and author of the white paper Travis Whitmore says: “By distilling some of the complexities in the ESG data landscape, we hope to further contribute to the significant amount of work already underway in this space by proposing methodological best practices that institutional investors and agent lenders can engage on.”
The report takes a data-centric approach in order to propose methodological frameworks that asset owners and agent lenders can use to navigate the integration of ESG into lending programmes. “We start by forming a holistic understanding of the ESG data landscape, including the different types of ESG sources and their unique attributes,” Whitmore says.
The paper examines how agent lenders and asset owners can leverage ESG data to incorporate individual ESG objectives into lending practices.
Crucially, the paper notes, the goal of agent lenders should not be to make a securities lending programme ESG compliant, but instead to provide channels for individual investors to express their views on ESG objectives. It may be that for one investor their ESG goals may be to reduce their carbon footprint, while for another their prime objective is to increase female representation in c-level or c-suite positions.
An effective ESG securities lending programme will help investors incorporate their individual considerations into their lending decisions, Whitmore says. Therefore, “ESG is a great mechanism to facilitate conversations between agent lenders and asset owners on their sustainability goals but should not be used to label a securities lending programme.”
The paper also highlights another aspect of securities lending that has been an area of friction; the collateral lenders receive from borrowers. While both cash and non-cash collateral have nuanced sustainability considerations, they share the underlying concern around the collateral’s acceptability with asset owner’s or manager’s ESG policies, the paper notes.
When lenders receive cash collateral, it is generally reinvested into highly liquid short-term funds to earn incremental returns. This raises the potential for a misalignment in the
underlying securities of the cash reinvestment vehicle and the ESG policies of the beneficial owner. Therefore, “securities lending programmes can work towards alleviating this concern by reinvesting cash into funds that consider ESG when selecting the underlying securities,” Whitmore says.
RMA FTAC co-chair Nick Delikaris says: “This paper provides an overview on the varying data sources and methodologies, which, to-date have been hard to understand, but taking a data-centric approach is the only way to implement a customized ESG-framework in a securities lending programme.”
RMA’s Director of Securities Lending and Global Markets Risk Fran Garritt says: “A previous RMA survey found that while the majority of institutional investors believe securities lending can coexist with ESG, they also agree that securities lending needs to evolve to integrate investors’ ESG considerations. This paper helps in that evolution.”
The paper follows the launch last week of a global framework designed to help institutional investors apply ESG principles to securities lending programmes. The Pan Asia Securities Lending Association and the RMA’s Global Framework for ESG and Securities Lending, based on extensive market research, focuses on what the two industry associations consider to be “six main touchpoints” between securities finance and ESG principles.
Integrating ESG Considerations into Securities Lending, authored by the RMA’s Financial Technology and Automation Committee and published on Wednesday, examines the different attributes of environmental, social and governance (ESG) data.
The paper also defines ESG in the context of securities lending and lays out best practices to facilitate shareholder activism in a securities lending programme, as well as potential non-cash and cash collateral solutions for sustainable lending.
SSA lead securities finance researcher and author of the white paper Travis Whitmore says: “By distilling some of the complexities in the ESG data landscape, we hope to further contribute to the significant amount of work already underway in this space by proposing methodological best practices that institutional investors and agent lenders can engage on.”
The report takes a data-centric approach in order to propose methodological frameworks that asset owners and agent lenders can use to navigate the integration of ESG into lending programmes. “We start by forming a holistic understanding of the ESG data landscape, including the different types of ESG sources and their unique attributes,” Whitmore says.
The paper examines how agent lenders and asset owners can leverage ESG data to incorporate individual ESG objectives into lending practices.
Crucially, the paper notes, the goal of agent lenders should not be to make a securities lending programme ESG compliant, but instead to provide channels for individual investors to express their views on ESG objectives. It may be that for one investor their ESG goals may be to reduce their carbon footprint, while for another their prime objective is to increase female representation in c-level or c-suite positions.
An effective ESG securities lending programme will help investors incorporate their individual considerations into their lending decisions, Whitmore says. Therefore, “ESG is a great mechanism to facilitate conversations between agent lenders and asset owners on their sustainability goals but should not be used to label a securities lending programme.”
The paper also highlights another aspect of securities lending that has been an area of friction; the collateral lenders receive from borrowers. While both cash and non-cash collateral have nuanced sustainability considerations, they share the underlying concern around the collateral’s acceptability with asset owner’s or manager’s ESG policies, the paper notes.
When lenders receive cash collateral, it is generally reinvested into highly liquid short-term funds to earn incremental returns. This raises the potential for a misalignment in the
underlying securities of the cash reinvestment vehicle and the ESG policies of the beneficial owner. Therefore, “securities lending programmes can work towards alleviating this concern by reinvesting cash into funds that consider ESG when selecting the underlying securities,” Whitmore says.
RMA FTAC co-chair Nick Delikaris says: “This paper provides an overview on the varying data sources and methodologies, which, to-date have been hard to understand, but taking a data-centric approach is the only way to implement a customized ESG-framework in a securities lending programme.”
RMA’s Director of Securities Lending and Global Markets Risk Fran Garritt says: “A previous RMA survey found that while the majority of institutional investors believe securities lending can coexist with ESG, they also agree that securities lending needs to evolve to integrate investors’ ESG considerations. This paper helps in that evolution.”
The paper follows the launch last week of a global framework designed to help institutional investors apply ESG principles to securities lending programmes. The Pan Asia Securities Lending Association and the RMA’s Global Framework for ESG and Securities Lending, based on extensive market research, focuses on what the two industry associations consider to be “six main touchpoints” between securities finance and ESG principles.
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