Looking beyond the ESG hype
27 April 2021
ESG is a hot-button topic, but are agent lenders’ and beneficial owners’ priorities aligned?
Image: Baranov/stock.adobe.com
Few trends have captured the market’s attention in recent years more than environmental, social and governance (ESG). Agent lenders across the world are touting their sustainable credentials at every opportunity in order to capture what myriad media headlines and panel discussions suggest is the hottest topic of the moment for their clients. Barely a day goes by without a report, webinar, product or fund launch that puts ESG at its core.
Service providers, including agent lenders, are participating in a collective mania around ESG and are jostling to present a plume of green feathers to what they perceive to be an increasingly socially conscious client base. But, are beneficial owners as concerned as the spin would suggest? And are agent lenders providing their existing, and importantly, their new clients, what they want?
eSecLending’s US head of business development Peter Bassler says ESG is an “emerging topic” as it pertains to on-boarding conversations. But in most cases it is not yet at the stage where it is informing tactical securities lending parameters or decision making, outside of voting, “which has always been a key focus for many of our clients,” Bassler says.
Northern Trust’s head of client management, North America, securities lending, Lori Paris says that because each client may have a different view on what ESG means to their securities lending programme, the bank discusses with its clients how to customise their programme parameters, such as accepted collateral, participating assets, and proxy voting. “Interest level in ESG appears to vary as to whether the client is an asset owner or an asset manager, as well as by region,” Paris says.
“As ESG permeates many discussions at investment firms and asset owners, the broad topic of how you implement ESG priorities within a securities lending programme is occurring as a strategic talking point,” Bassler says.
While asset owners typically select investment managers that align with their ESG mandates — and don’t focus heavily on ESG within securities lending specifically — asset manager clients that self-manage are more likely to desire alignment with proxy voting policies and ESG considerations of non-cash collateral acceptance.
“Enabled by regulations such as the EU’s Action Plan on Sustainable Finance, ESG-related discussions are more prominent in Europe, Middle East and Africa and Asia Pacific, but are on the rise in North America,” Paris observes. This is also the case at Northern Trust — ESG generally has been more of a focus in Europe but it is becoming a priority across the investment landscape in the US and other regions as well, according to Bassler.
Elsewhere, Standard Chartered’s global head of agency securities lending Sunil Daswani says that ESG issues have become a priority among his clients. This is the result of changing attitudes on one hand, but also an awareness that well-managed companies, that operate responsibly and sustainably are more likely to be successful in the longer term and be more resilient in a crisis.
There’s also a growing awareness of the impact of poor ESG performance on reputational risk, which can rapidly and materially affect the value of a company. However, Daswani adds, each client has different ESG priorities. Clients are looking for segregated securities lending solutions that are tailored to individual ESG priorities while seeking higher risk-adjusted returns and greater transparency than traditional, pool-based lending programmes, he explains.
Of the three areas of ESG, the ‘E’ and ‘G’ appear to be the most salient today. At eSecLending, the governance aspect has “always been present in our conversations”, Bassler says, which historically has directly translated to proxy voting and how that coexists with securities lending. “As a security on-loan loses the right to vote, our clients take different approaches to managing recalling securities for instances where they want to vote a given proxy,” he adds.
Helpfully, eSecLending offers a unique product with ISS — provider of proxy advisory and corporate governance solutions to financial market participants — to help lenders manage the competing interest of voting and earning revenue from securities lending. This partnership aims to overlay the ‘E’ and the ‘S’ to give lenders a more granular way to think about ESG within their proxy voting guidelines, Bassler explains.
Similarly, at Northern Trust, the majority of ESG questions relate to governance and, specifically, ensuring compliance with beneficial owners’ proxy voting policy.
The second emphasis at Northern Trust is on ESG considerations of non-cash collateral acceptance, “as all loans must be fully collateralised and beneficial owners with ESG mandates want assurances that the accepted collateral does not breach their guidelines,” Paris adds.
But, ultimately, at Northern Trust, each investor decides which principles matter most to them, “despite the emergence of ESG benchmarks, indices and the development of principles for the assessment of companies and responsible investment”.
For some, the focus is low-carbon-footprint investing, whereas others may view this through a more ethical lens and focus on the exclusion of controversial companies, such as arms manufacturers. “Whatever the approach adopted, we believe it is important for us to support our client’s requirements in this space, and the core principles of responsible investing more broadly,” Paris concludes.
However, at Standard Chartered, the ‘E’ seems to be the most talked about priority. Daswani says there are several indices available, such as MSCI UK IMI Low Carbon SRI Leaders Select index which tracks small and mid-cap UK entities with high ESG scores. However, there is still a long way to go in establishing a consistent way of measuring and comparing fund performance at an industry level, Daswani says. Some investors will prioritise carbon emissions, others will look more at issues such as energy consumption, pollution, corporate governance diversity and inclusion will be more important.
Whether it’s ‘E’, ‘S’ or ‘G’, sustainability concerns are more common than they used to be. “Right now, the question being asked is: is securities lending ESG-friendly and can the two coexist?”, Bassler says. He says many industry papers have been written on the topic and when an agent manages customised lending programmes, a lender can tailor their strategy to address all investment concerns including ESG-related sensitivities.
Without a doubt, ESG is one of the newer phenomena, Daswani says. “It’s an important one for all of us, and it’s great to see institutions wanting to lead the way and do their bit to ensure ESG is the priority that it should be,” he adds. Nearly every client looking at services wants to understand how Standard Chartered can integrate ESG — typically in securities lending this will be the ESG policies of clients that we need to adhere to or implement within our product, Daswani adds.
Paris says ESG discussions are much more common and most clients are interested in understanding the impact of any restrictions on securities lending revenue opportunities and this forms part of the ongoing performance dialogue as well.
The same goes for eSecLending. How agent lenders can adjust lending priorities to mirror ESG policies is an emerging topic, Bassler says. “This is something we are actively working on at eSecLending — to introduce additional tools that clients can use to manage their securities lending programs within their ESG priorities,” he adds.
Now to get into some numbers. While ESG concerns are becoming increasingly common for new and existing beneficial owners alike, does the number of clients who are ESG-aware constitute a significant proportion of an agent lender’s base? Interestingly, it seems that the majority are interested in ESG as it pertains to securities lending and want it to inform their portfolios.
For the ESG topic generally, at eSecLending, around half of beneficial owners are asking about how it relates to securities lending. But the question of ‘how can I apply ESG principles to my lending structure?’ constitutes a lower percentage, according to Bassler, “but the trend is emerging and we anticipate it will continue to be an increasing focus of conversation”. The fact that lending agents need to be prepared to customise their offerings to match lenders emerging and growing ESG considerations is becoming increasingly prevalent.
While Northern Trust does not track the number of new or existing clients who are concerned or ask about ESG, the figures are similar to those of eSecLending for new clients. However, only a minority of existing clients ask, Paris observes, and again they are more heavily weighted to EMEA and APAC as well as asset managers globally.
Standard Chartered’s Daswani says ESG issues are fast emerging as important priorities for institutional investors. He quotes research published by Edelman in November 2020, covering 600 investors in six key markets, that revealed that 87 per cent of institutional investors already actively invest in companies that have reduced their near-term return on capital in order to reallocate capital to ESG initiatives. And 91 per cent believe that companies with strong ESG performance are more resilient in a crisis.
“It’s fair to say that nearly all beneficial owners if they don’t have ESG policies now, feel that they should implement them — we can help them with such requirements,” Daswani adds.
It’s all very well that clients are asking for ESG and agent lenders want to provide it, but without metrics and credentials, it’s impossible to adequately measure ESG credentials. All the agent lenders SFT spoke to had either existing platforms and tools to combat this or were working on developing such tools.
On a macro level, the level-one requirements of the Sustainable Finance Disclosure Regulation came into effect on 10 March, representing EU regulators’ first attempt at standardising ESG principles, which demand high-level disclosures from financial institutions on any product they deem to be ESG-friendly.
But the regulation has much to be desired when it comes to crystallising various ESG concepts. Despite the regulation being live for more than a month, EU policy-makers are yet to respond to the well-documented market calls for clarity on several issues that will significantly affect the role of securities lending in the new sustainable market environment.
Northern Trust’s platform allows the firm to support clients’ voting needs in a number of ways depending on their governance policy and they can apply a wide range of restrictions across other lending parameters. But from a collateral perspective, “it can be challenging as every client has a different need depending on their specific view”, Paris says.
eSecLending is also working on enhancing existing tools and creating new ones to create ESG filters across the securities lending transaction that include voting proxies, non-cash collateral screening and potentially filter for cash investments and securities borrowers as well.
Northern Trust is part of an industry working group affiliated with the Risk Management Association and the International Securities Lending Association to coordinate best practices and key considerations on implementing a lending programme within their ESG framework. “We expect some consolidation as ESG-based indices and benchmarks become more prevalent and widely used, but at present, we are focused on being able to provide the flexibility to manage a wide range of different client requirements that support their ESG mandate,” Paris adds.
At Standard Chartered the securities lending product is operated through eSecLending’s fully segregated programme which allows for specific client customisation. “This approach also enables better adherence to client-specific ESG requirements,” Daswani says. Parameters can be set to tailor proxy voting requirements, collateral restriction or borrower restrictions based upon whatever the clients ESG policy may dictate.
“We are seeing various initiatives emerge to develop ESG measurement and comparison tools, both amongst individual providers and at a wider industry level,” Daswani says. One of the most promising of these is the Global Principles for Sustainable Securities Lending initiative, which aims to create a global ESG market standard for owners, lenders, borrowers and impact creators, such as Standard Chartered.
However, market forces alone will not be able to bring the industry together on what ESG means and how important it is for the financing industry or others. Despite the novel challenges of writing rules based on principles rather than distinct market features, regulator input is essential to separate those with attractive window dressing from those who have structured their whole shop to embrace the modern, ESG world.
Service providers, including agent lenders, are participating in a collective mania around ESG and are jostling to present a plume of green feathers to what they perceive to be an increasingly socially conscious client base. But, are beneficial owners as concerned as the spin would suggest? And are agent lenders providing their existing, and importantly, their new clients, what they want?
eSecLending’s US head of business development Peter Bassler says ESG is an “emerging topic” as it pertains to on-boarding conversations. But in most cases it is not yet at the stage where it is informing tactical securities lending parameters or decision making, outside of voting, “which has always been a key focus for many of our clients,” Bassler says.
Northern Trust’s head of client management, North America, securities lending, Lori Paris says that because each client may have a different view on what ESG means to their securities lending programme, the bank discusses with its clients how to customise their programme parameters, such as accepted collateral, participating assets, and proxy voting. “Interest level in ESG appears to vary as to whether the client is an asset owner or an asset manager, as well as by region,” Paris says.
“As ESG permeates many discussions at investment firms and asset owners, the broad topic of how you implement ESG priorities within a securities lending programme is occurring as a strategic talking point,” Bassler says.
While asset owners typically select investment managers that align with their ESG mandates — and don’t focus heavily on ESG within securities lending specifically — asset manager clients that self-manage are more likely to desire alignment with proxy voting policies and ESG considerations of non-cash collateral acceptance.
“Enabled by regulations such as the EU’s Action Plan on Sustainable Finance, ESG-related discussions are more prominent in Europe, Middle East and Africa and Asia Pacific, but are on the rise in North America,” Paris observes. This is also the case at Northern Trust — ESG generally has been more of a focus in Europe but it is becoming a priority across the investment landscape in the US and other regions as well, according to Bassler.
Elsewhere, Standard Chartered’s global head of agency securities lending Sunil Daswani says that ESG issues have become a priority among his clients. This is the result of changing attitudes on one hand, but also an awareness that well-managed companies, that operate responsibly and sustainably are more likely to be successful in the longer term and be more resilient in a crisis.
There’s also a growing awareness of the impact of poor ESG performance on reputational risk, which can rapidly and materially affect the value of a company. However, Daswani adds, each client has different ESG priorities. Clients are looking for segregated securities lending solutions that are tailored to individual ESG priorities while seeking higher risk-adjusted returns and greater transparency than traditional, pool-based lending programmes, he explains.
Of the three areas of ESG, the ‘E’ and ‘G’ appear to be the most salient today. At eSecLending, the governance aspect has “always been present in our conversations”, Bassler says, which historically has directly translated to proxy voting and how that coexists with securities lending. “As a security on-loan loses the right to vote, our clients take different approaches to managing recalling securities for instances where they want to vote a given proxy,” he adds.
Helpfully, eSecLending offers a unique product with ISS — provider of proxy advisory and corporate governance solutions to financial market participants — to help lenders manage the competing interest of voting and earning revenue from securities lending. This partnership aims to overlay the ‘E’ and the ‘S’ to give lenders a more granular way to think about ESG within their proxy voting guidelines, Bassler explains.
Similarly, at Northern Trust, the majority of ESG questions relate to governance and, specifically, ensuring compliance with beneficial owners’ proxy voting policy.
The second emphasis at Northern Trust is on ESG considerations of non-cash collateral acceptance, “as all loans must be fully collateralised and beneficial owners with ESG mandates want assurances that the accepted collateral does not breach their guidelines,” Paris adds.
But, ultimately, at Northern Trust, each investor decides which principles matter most to them, “despite the emergence of ESG benchmarks, indices and the development of principles for the assessment of companies and responsible investment”.
For some, the focus is low-carbon-footprint investing, whereas others may view this through a more ethical lens and focus on the exclusion of controversial companies, such as arms manufacturers. “Whatever the approach adopted, we believe it is important for us to support our client’s requirements in this space, and the core principles of responsible investing more broadly,” Paris concludes.
However, at Standard Chartered, the ‘E’ seems to be the most talked about priority. Daswani says there are several indices available, such as MSCI UK IMI Low Carbon SRI Leaders Select index which tracks small and mid-cap UK entities with high ESG scores. However, there is still a long way to go in establishing a consistent way of measuring and comparing fund performance at an industry level, Daswani says. Some investors will prioritise carbon emissions, others will look more at issues such as energy consumption, pollution, corporate governance diversity and inclusion will be more important.
Whether it’s ‘E’, ‘S’ or ‘G’, sustainability concerns are more common than they used to be. “Right now, the question being asked is: is securities lending ESG-friendly and can the two coexist?”, Bassler says. He says many industry papers have been written on the topic and when an agent manages customised lending programmes, a lender can tailor their strategy to address all investment concerns including ESG-related sensitivities.
Without a doubt, ESG is one of the newer phenomena, Daswani says. “It’s an important one for all of us, and it’s great to see institutions wanting to lead the way and do their bit to ensure ESG is the priority that it should be,” he adds. Nearly every client looking at services wants to understand how Standard Chartered can integrate ESG — typically in securities lending this will be the ESG policies of clients that we need to adhere to or implement within our product, Daswani adds.
Paris says ESG discussions are much more common and most clients are interested in understanding the impact of any restrictions on securities lending revenue opportunities and this forms part of the ongoing performance dialogue as well.
The same goes for eSecLending. How agent lenders can adjust lending priorities to mirror ESG policies is an emerging topic, Bassler says. “This is something we are actively working on at eSecLending — to introduce additional tools that clients can use to manage their securities lending programs within their ESG priorities,” he adds.
Now to get into some numbers. While ESG concerns are becoming increasingly common for new and existing beneficial owners alike, does the number of clients who are ESG-aware constitute a significant proportion of an agent lender’s base? Interestingly, it seems that the majority are interested in ESG as it pertains to securities lending and want it to inform their portfolios.
For the ESG topic generally, at eSecLending, around half of beneficial owners are asking about how it relates to securities lending. But the question of ‘how can I apply ESG principles to my lending structure?’ constitutes a lower percentage, according to Bassler, “but the trend is emerging and we anticipate it will continue to be an increasing focus of conversation”. The fact that lending agents need to be prepared to customise their offerings to match lenders emerging and growing ESG considerations is becoming increasingly prevalent.
While Northern Trust does not track the number of new or existing clients who are concerned or ask about ESG, the figures are similar to those of eSecLending for new clients. However, only a minority of existing clients ask, Paris observes, and again they are more heavily weighted to EMEA and APAC as well as asset managers globally.
Standard Chartered’s Daswani says ESG issues are fast emerging as important priorities for institutional investors. He quotes research published by Edelman in November 2020, covering 600 investors in six key markets, that revealed that 87 per cent of institutional investors already actively invest in companies that have reduced their near-term return on capital in order to reallocate capital to ESG initiatives. And 91 per cent believe that companies with strong ESG performance are more resilient in a crisis.
“It’s fair to say that nearly all beneficial owners if they don’t have ESG policies now, feel that they should implement them — we can help them with such requirements,” Daswani adds.
It’s all very well that clients are asking for ESG and agent lenders want to provide it, but without metrics and credentials, it’s impossible to adequately measure ESG credentials. All the agent lenders SFT spoke to had either existing platforms and tools to combat this or were working on developing such tools.
On a macro level, the level-one requirements of the Sustainable Finance Disclosure Regulation came into effect on 10 March, representing EU regulators’ first attempt at standardising ESG principles, which demand high-level disclosures from financial institutions on any product they deem to be ESG-friendly.
But the regulation has much to be desired when it comes to crystallising various ESG concepts. Despite the regulation being live for more than a month, EU policy-makers are yet to respond to the well-documented market calls for clarity on several issues that will significantly affect the role of securities lending in the new sustainable market environment.
Northern Trust’s platform allows the firm to support clients’ voting needs in a number of ways depending on their governance policy and they can apply a wide range of restrictions across other lending parameters. But from a collateral perspective, “it can be challenging as every client has a different need depending on their specific view”, Paris says.
eSecLending is also working on enhancing existing tools and creating new ones to create ESG filters across the securities lending transaction that include voting proxies, non-cash collateral screening and potentially filter for cash investments and securities borrowers as well.
Northern Trust is part of an industry working group affiliated with the Risk Management Association and the International Securities Lending Association to coordinate best practices and key considerations on implementing a lending programme within their ESG framework. “We expect some consolidation as ESG-based indices and benchmarks become more prevalent and widely used, but at present, we are focused on being able to provide the flexibility to manage a wide range of different client requirements that support their ESG mandate,” Paris adds.
At Standard Chartered the securities lending product is operated through eSecLending’s fully segregated programme which allows for specific client customisation. “This approach also enables better adherence to client-specific ESG requirements,” Daswani says. Parameters can be set to tailor proxy voting requirements, collateral restriction or borrower restrictions based upon whatever the clients ESG policy may dictate.
“We are seeing various initiatives emerge to develop ESG measurement and comparison tools, both amongst individual providers and at a wider industry level,” Daswani says. One of the most promising of these is the Global Principles for Sustainable Securities Lending initiative, which aims to create a global ESG market standard for owners, lenders, borrowers and impact creators, such as Standard Chartered.
However, market forces alone will not be able to bring the industry together on what ESG means and how important it is for the financing industry or others. Despite the novel challenges of writing rules based on principles rather than distinct market features, regulator input is essential to separate those with attractive window dressing from those who have structured their whole shop to embrace the modern, ESG world.
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