ISLA weighs up ESG factors following GPIF’s sec lending removal
06 December 2019 London
Image: Shutterstock
The Japanese Government Pension Investment Fund’s (GPIF) decision to remove its securities lending programme raises important questions around environmental, social, and governance (ESG), says Andrew Dyson, CEO of the International Securities Lending Association (ISLA). GPIF’s decision caused a stir in the industry with many people weighing in on their views on securities lending. Dyson highlighted that the relationship between short sellers and long-term investors came under scrutiny. One such person who scrutinised short selling was Elon Musk, CEO of Telsa, an electric car maker and prolific short target, who wrote on Twitter: “Bravo, right thing to do! Short selling should be illegal.” In Dyson’s ‘Reflections of the CEO’, he highlighted that GPIF’s reasoning behind its securities lending scrap had been enveloped in ‘sustainable finance or ESG wrappers’. This, according to Dyson, raises a number of important questions for all of us, as we think more broadly about the developing ESG agenda as well as other important initiatives such as the Shareholders Rights Directive (SRD) in Europe. Dyson explained that ISLA has seen comments from some quarters suggesting that short selling should be banned, however, looking at short selling through an ESG lens, could to a point, be misleading. Dyson outlined: “In its simplest form, short selling is a platform for an investor to express sentiment either in a stock or an index, and as such may be no different to an index manager going over or underweight the index that they are tracking.” “Furthermore, we now see robust regulation in the form of short selling rules that ensure opportunities to use short selling in an overly aggressive way by using techniques such as naked short selling, are effectively curtailed or banned,” Dyson added. Elsewhere in Dyson’s reflections, he noted that the role of securities lending and voting has been another much discussed topic this week, with the issue coming into sharper focus as the industry looks at the governance principles laid out within the ESG framework. Adding to its prominence, is the implications of the implementation of the SRD which is due in 2020. On this topic, Dyson emphasised the point that the language within the Bank of England sponsored UK Money Markets Code that specifically highlights that securities should not be borrowed for the sole purpose of exercising voting rights. Meanwhile, looking at the landscape that is familiar but with ‘increasingly different drivers’, Dyson commented: “I think we have to ask ourselves what we need to do and advocate so as to ensure institutional investors continue to both lend securities, but also discharge their responsibilities in the context of ESG.” “As we look at ESG in particular, it is important that investors develop policies around their own preferences in areas such as voting, governance and even short selling. To do this in isolation will over time mean we will see a proliferation of bespoke frameworks, that will present challenges for agent lenders and borrowers alike. I believe it is, therefore, incumbent upon industry associations to lead the way on developing principles that support securities lending in the context of ESG, that the industry as a whole can embrace,” Dyson concluded.
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