Seeking a sustainable future
28 September 2021
Sunil Daswani, Standard Chartered Bank’s global head of securities lending, speaks to Carmella Haswell about the importance of ESG, how to reach a sustainable future and what’s driving demand and supply within the securities lending market
Image: Sunil Daswani
Standard Chartered is among the 17 opening signatories for revised principles released by the Global Principles for Sustainable Securities Lending (Global PSSL) earlier this month. The principles aim to promote and embed environmental, social and governance (ESG) matters and Sustainable Development Goals (SDG) in securities lending activities.
ESG has been a priority within the market for some time now, with a growing number of investors allocating more than 75 per cent of their portfolio to ESG-compliant assets and 37 per cent making a public commitment to align all or part of their portfolio with a 2050 net-zero target, according to a recent BNP Paribas survey. The dynamic that the securities lending world wishes to attain has never been clearer.
Firms across the securities lending industry have launched platforms and technology that strives to achieve an ESG-friendly solution for its clients. For example, Kaizen Reporting released its ESG monitoring tool, ESI Monitor, in September. The tool provides a framework for its clients to measure and manage environmental and social impact, revealing a client demand to reach a greener way of life.
The importance of ESG
Speaking to SFT, Standard Chartered Bank’s global head of securities lending, Sunil Daswani, explores the importance of becoming an open signatory for the revised Global PSSL principles.
He says: “ESG has been on the agenda for many years, but there is a recent acceleration across all industries to embed ESG priorities into their business models. We are committed to delivering sustainable banking and the Global Principles for Sustainable Securities Lending will help to support the work we are doing to incorporate ESG into our services, as we align with the priorities of our clients and the communities we operate in.”
Despite a number of indices being available to support investment decision-making around ESG, Daswani believes there is a long way to go in establishing a consistent way of measuring and comparing fund performance at an industry level.
He says: “One challenge is that investors have different ESG priorities, some investors will prioritise carbon emissions, while others will look at issues such as energy consumption, pollution, corporate governance, and diversity and inclusion. This creates an enormous demand for a wide range of data, which needs to be monitored and tracked over time.
“However, we are seeing various initiatives emerge to develop ESG measurement and comparison tools, both amongst individual providers and at a wider industry level. One of the most promising of these is the Global PSSL initiative. This aims to create a global ESG market standard for owners, lenders, borrowers and impact creators, such as Standard Chartered.”
Reaching sustainability goals
In May 2021, Standard Chartered announced the execution of its first ESG-linked derivative with Trafigura. The transaction involved combining conventional derivatives risk management with sustainability-linked key performance indicators (KPIs) that are linked to reducing greenhouse emissions from owned or controlled sources, and to sustainable sourcing in the base metals business.
The firm also provides a collateral filtering and monitoring service that gives asset managers the assurance that their investors’ ESG priorities are reflected through the securities lending process.
Daswani says: “Given that an investor cannot participate in shareholder votes (typically via proxy), when they have lent a security, they may decide to recall a security to allow them to do so. This issue resonates specifically for ESG-driven investment, where institutional shareholders may play an important role in defining a company’s ESG strategy.
“Our configurable, automated share recall service enables clients to make informed decisions on whether to recall securities or leave them on loan. This service helps reduce the opportunity cost by limiting the frequency of recall, and the time period for which securities are removed from the lending programme, whilst enabling investors to engage on key strategic issues.”
Demand and supply
The driving factor of demand and supply within the securities lending market is forever changing, especially when impacted by uncertain times, which has been brought by the COVID-19 pandemic. Daswani reveals that a “negative impact” on revenues has resulted from the combination of volatility and economic uncertainty, as loan demands have reduced, with hedge funds deleveraging and short-selling bans in some markets.
He says: “Lenders have generally taken a calm approach to managing risks arising from COVID-19 and adjusted their securities lending programmes accordingly. One big change since the global financial crisis is the increased transparency in securities lending programmes, so beneficial owners have a better understanding of their programme and the risk parameters.
“As we go through 2021, emerging markets continue to be an attractive sector, with relatively low levels of lendable supply and additional operational requirements leading to higher returns for lenders, particularly early market entrants. As we have seen in countries such as South Korea, Taiwan, Malaysia, and more recently, Russia, initial demand often outstrips supply as new markets open up, and we are likely to see the same in the coming year in China, and other newly emerging markets for securities lending.”
A growing market
After just over 12 months as Standard Chartered’s global head for securities lending, Daswani reveals the changes he has seen within the sector during this time and what is driving the company’s development focus.
“Regulators recognise that securities lending has become increasingly integral to financial markets as a source of liquidity and financing as well as efficient price discovery. Their focus now is to promote transparency and alignment between market participants to reduce market risk and increase efficiency,” says Daswani.
He continues: “Data is key to this, as we have seen with the implementation of Securities Financing Transactions Regulation (SFTR) reporting that took effect in 2020. In addition, the Central Securities Depositories Regulation (CSDR), which aims to harmonise timing and standards of conduct in the European securities settlement industry, will also have an impact, but with the implementation delayed to February 2022, the effects are not yet clear.”
Digitisation is also a priority for securities lending markets, which has become key to regulatory and market endeavours to drive standardisation and efficiency, according to Daswani.
He explains: “Securities lending is already advanced in the use of technology, with more than 90 per cent of securities lending trading volume now done through automated lending platforms, a shift that few would have anticipated 20 years ago”.
The common Domain model also appears to be gaining good traction within the industry. ”This is something which Standard Chartered remains committed to supporting as ISLA drives this item on the agenda forward,” says Daswani.
ESG has been a priority within the market for some time now, with a growing number of investors allocating more than 75 per cent of their portfolio to ESG-compliant assets and 37 per cent making a public commitment to align all or part of their portfolio with a 2050 net-zero target, according to a recent BNP Paribas survey. The dynamic that the securities lending world wishes to attain has never been clearer.
Firms across the securities lending industry have launched platforms and technology that strives to achieve an ESG-friendly solution for its clients. For example, Kaizen Reporting released its ESG monitoring tool, ESI Monitor, in September. The tool provides a framework for its clients to measure and manage environmental and social impact, revealing a client demand to reach a greener way of life.
The importance of ESG
Speaking to SFT, Standard Chartered Bank’s global head of securities lending, Sunil Daswani, explores the importance of becoming an open signatory for the revised Global PSSL principles.
He says: “ESG has been on the agenda for many years, but there is a recent acceleration across all industries to embed ESG priorities into their business models. We are committed to delivering sustainable banking and the Global Principles for Sustainable Securities Lending will help to support the work we are doing to incorporate ESG into our services, as we align with the priorities of our clients and the communities we operate in.”
Despite a number of indices being available to support investment decision-making around ESG, Daswani believes there is a long way to go in establishing a consistent way of measuring and comparing fund performance at an industry level.
He says: “One challenge is that investors have different ESG priorities, some investors will prioritise carbon emissions, while others will look at issues such as energy consumption, pollution, corporate governance, and diversity and inclusion. This creates an enormous demand for a wide range of data, which needs to be monitored and tracked over time.
“However, we are seeing various initiatives emerge to develop ESG measurement and comparison tools, both amongst individual providers and at a wider industry level. One of the most promising of these is the Global PSSL initiative. This aims to create a global ESG market standard for owners, lenders, borrowers and impact creators, such as Standard Chartered.”
Reaching sustainability goals
In May 2021, Standard Chartered announced the execution of its first ESG-linked derivative with Trafigura. The transaction involved combining conventional derivatives risk management with sustainability-linked key performance indicators (KPIs) that are linked to reducing greenhouse emissions from owned or controlled sources, and to sustainable sourcing in the base metals business.
The firm also provides a collateral filtering and monitoring service that gives asset managers the assurance that their investors’ ESG priorities are reflected through the securities lending process.
Daswani says: “Given that an investor cannot participate in shareholder votes (typically via proxy), when they have lent a security, they may decide to recall a security to allow them to do so. This issue resonates specifically for ESG-driven investment, where institutional shareholders may play an important role in defining a company’s ESG strategy.
“Our configurable, automated share recall service enables clients to make informed decisions on whether to recall securities or leave them on loan. This service helps reduce the opportunity cost by limiting the frequency of recall, and the time period for which securities are removed from the lending programme, whilst enabling investors to engage on key strategic issues.”
Demand and supply
The driving factor of demand and supply within the securities lending market is forever changing, especially when impacted by uncertain times, which has been brought by the COVID-19 pandemic. Daswani reveals that a “negative impact” on revenues has resulted from the combination of volatility and economic uncertainty, as loan demands have reduced, with hedge funds deleveraging and short-selling bans in some markets.
He says: “Lenders have generally taken a calm approach to managing risks arising from COVID-19 and adjusted their securities lending programmes accordingly. One big change since the global financial crisis is the increased transparency in securities lending programmes, so beneficial owners have a better understanding of their programme and the risk parameters.
“As we go through 2021, emerging markets continue to be an attractive sector, with relatively low levels of lendable supply and additional operational requirements leading to higher returns for lenders, particularly early market entrants. As we have seen in countries such as South Korea, Taiwan, Malaysia, and more recently, Russia, initial demand often outstrips supply as new markets open up, and we are likely to see the same in the coming year in China, and other newly emerging markets for securities lending.”
A growing market
After just over 12 months as Standard Chartered’s global head for securities lending, Daswani reveals the changes he has seen within the sector during this time and what is driving the company’s development focus.
“Regulators recognise that securities lending has become increasingly integral to financial markets as a source of liquidity and financing as well as efficient price discovery. Their focus now is to promote transparency and alignment between market participants to reduce market risk and increase efficiency,” says Daswani.
He continues: “Data is key to this, as we have seen with the implementation of Securities Financing Transactions Regulation (SFTR) reporting that took effect in 2020. In addition, the Central Securities Depositories Regulation (CSDR), which aims to harmonise timing and standards of conduct in the European securities settlement industry, will also have an impact, but with the implementation delayed to February 2022, the effects are not yet clear.”
Digitisation is also a priority for securities lending markets, which has become key to regulatory and market endeavours to drive standardisation and efficiency, according to Daswani.
He explains: “Securities lending is already advanced in the use of technology, with more than 90 per cent of securities lending trading volume now done through automated lending platforms, a shift that few would have anticipated 20 years ago”.
The common Domain model also appears to be gaining good traction within the industry. ”This is something which Standard Chartered remains committed to supporting as ISLA drives this item on the agenda forward,” says Daswani.
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