How can securities lending do well and do good?
30 August 2022
Madeleine Senior, managing director, regional head of financing and securities services, Europe and Americas at Standard Chartered Bank, discusses the importance of embedding ESG into investment decision-making and the role of agency securities lending in ESG programmes
Image: Madeleine Senior
The past two years has seen a major escalation in the importance of environmental, social and governance (ESG) issues for institutional investors, and the financial services industry that supports them. ESG and sustainability principles are at the heart of Standard Chartered’s strategy, solutions and culture — which includes our agency securities lending business. As part of this commitment, we were one of the first signatories to the Global Principles for Sustainable Securities Lending initiative in 2021. These principles aim to promote and embed good ESG practices and commitment to the United Nations’ Sustainable Development Goals into securities lending activities.
However, while many providers of securities lending programmes will share these principles, they are difficult to implement in traditional programmes. In contrast, by taking an innovative approach to segregated programmes and their design, and data-driven proxy voting, we enable beneficial owners to reflect their ESG principles into their securities lending programme while maintaining a compelling return.
Embedding ESG into investment decision making
According to an Edelman study in November 2020, 87 per cent of institutional investors already actively invest in companies that have reduced their near-term return on capital (i.e., dividends and share buybacks) to reallocate capital to ESG initiatives. This is likely to prove a long-term trend, with investors’ motivation for embedding ESG into their investment strategy based on an awareness of the importance of sustainable business practices in long-term business performance and risk management. The study highlights that 91 per cent of institutional investors expect their firms to rank ESG more highly post-COVID, and 88 per cent believe that the companies they invest in will do so. While investors’ ESG priorities vary, 91 per cent believe that companies with strong ESG performance are more resilient in a crisis.
Agency lending in an integrated ESG programme
Agency securities lending can play a significant role in enabling institutional investors to achieve their ESG and investment return objectives, but there are a number of challenges, including:
Adapting programmes to investors’ ESG priorities. Every beneficial owner has their own ESG priorities, but a tailored securities lending programme that meet each lender’s asset, collateral, and counterparty criteria, and enables proxy voting in line with these criterion, is inconsistent with a standardised approach to securities lending employed by most providers.
Doing well while doing good. There have been some concerns among asset managers that securities lending programmes for exchange-traded funds (ETFs) that track ESG indices are not financially viable, given that restrictive collateral parameters and regular recalls to vote proxies erode the potential revenue from lending.
Ensuring good ESG from end-to-end. Asset owners are keen to ensure that securities are not being borrowed to secure votes that may not be aligned with their own ESG objectives. In addition, they want the assurance that their ESG principles are reflected in both collateral and cash reinvestment.
An integrated and bespoke approach
Standard Chartered, in partnership with eSecLending, has taken an innovative approach to overcoming these issues, by providing the tailored securities lending that beneficial owners require, while maintaining the commercial viability of the programme.
Firstly, we offer segregated (as opposed to pooled) programmes, so that investors can tailor their securities lending programme in line with their ESG objectives. This includes enabling investors to apply the same conditions to collateral as lent securities. This is an important element of the work that the International Securities Lending Association (ISLA) is currently engaged with, alongside Allen & Overy (‘Framing securities lending for the sustainability’), to establish best practices for incorporating ESG principles into securities lending.
Secondly, we work with our partner eSecLending to take a data-driven approach to identifying and withdrawing securities from lending programmes very precisely, minimising lost lending income. This solution, ProxyValue, is a highly configurable, automated share recall service that uses rich data provided by ISS to predict record dates with a high degree of confidence. It combines this with economic data, enabling clients to make informed decisions on whether to recall securities or leave them on loan. The opportunity cost is reduced by limiting the frequency of recall and the time securities are removed from the lending programme. Furthermore, the ISS data set includes detailed ancillary data, such as on M&A or proxy contests, which is valuable for making informed decisions on stock recalls, but difficult for the lender to track independently.
Setting an industry precedent
With the impact of climate change and social inequality becoming ever more evident globally, it is our hope and belief that ESG principles will become increasingly central to investment decision-making, which in turn will drive corporate behaviours and priorities. Standard Chartered, together with eSecLending, have offered a blueprint for the wider industry to demonstrate how doing good and doing well can go hand-in-hand.
Simon Lee, managing director of business development for EMEA and APAC at eSecLending, notes: “Our role as an agent lender is to support our client requirements in the ESG space, which increasingly looks to address criteria pertaining to the collateral we hold on their behalf and the counterparties we lend to, in addition to the more familiar topic of proxy voting. Given every beneficial owner will view the subject through their own unique corporate lens, the challenge for the industry is to provide client-centric solutions that can be accommodated within the confines of agent lending programmes that by their nature have been designed to standardise as much as possible their service offering.”
Traditionally, investment decision-making has combined liquidity, risk and yield. By showing that ESG and sustainability are directly aligned with, and impact on these principles, ESG is set to become the essential fourth pillar of the investments industry.
However, while many providers of securities lending programmes will share these principles, they are difficult to implement in traditional programmes. In contrast, by taking an innovative approach to segregated programmes and their design, and data-driven proxy voting, we enable beneficial owners to reflect their ESG principles into their securities lending programme while maintaining a compelling return.
Embedding ESG into investment decision making
According to an Edelman study in November 2020, 87 per cent of institutional investors already actively invest in companies that have reduced their near-term return on capital (i.e., dividends and share buybacks) to reallocate capital to ESG initiatives. This is likely to prove a long-term trend, with investors’ motivation for embedding ESG into their investment strategy based on an awareness of the importance of sustainable business practices in long-term business performance and risk management. The study highlights that 91 per cent of institutional investors expect their firms to rank ESG more highly post-COVID, and 88 per cent believe that the companies they invest in will do so. While investors’ ESG priorities vary, 91 per cent believe that companies with strong ESG performance are more resilient in a crisis.
Agency lending in an integrated ESG programme
Agency securities lending can play a significant role in enabling institutional investors to achieve their ESG and investment return objectives, but there are a number of challenges, including:
Adapting programmes to investors’ ESG priorities. Every beneficial owner has their own ESG priorities, but a tailored securities lending programme that meet each lender’s asset, collateral, and counterparty criteria, and enables proxy voting in line with these criterion, is inconsistent with a standardised approach to securities lending employed by most providers.
Doing well while doing good. There have been some concerns among asset managers that securities lending programmes for exchange-traded funds (ETFs) that track ESG indices are not financially viable, given that restrictive collateral parameters and regular recalls to vote proxies erode the potential revenue from lending.
Ensuring good ESG from end-to-end. Asset owners are keen to ensure that securities are not being borrowed to secure votes that may not be aligned with their own ESG objectives. In addition, they want the assurance that their ESG principles are reflected in both collateral and cash reinvestment.
An integrated and bespoke approach
Standard Chartered, in partnership with eSecLending, has taken an innovative approach to overcoming these issues, by providing the tailored securities lending that beneficial owners require, while maintaining the commercial viability of the programme.
Firstly, we offer segregated (as opposed to pooled) programmes, so that investors can tailor their securities lending programme in line with their ESG objectives. This includes enabling investors to apply the same conditions to collateral as lent securities. This is an important element of the work that the International Securities Lending Association (ISLA) is currently engaged with, alongside Allen & Overy (‘Framing securities lending for the sustainability’), to establish best practices for incorporating ESG principles into securities lending.
Secondly, we work with our partner eSecLending to take a data-driven approach to identifying and withdrawing securities from lending programmes very precisely, minimising lost lending income. This solution, ProxyValue, is a highly configurable, automated share recall service that uses rich data provided by ISS to predict record dates with a high degree of confidence. It combines this with economic data, enabling clients to make informed decisions on whether to recall securities or leave them on loan. The opportunity cost is reduced by limiting the frequency of recall and the time securities are removed from the lending programme. Furthermore, the ISS data set includes detailed ancillary data, such as on M&A or proxy contests, which is valuable for making informed decisions on stock recalls, but difficult for the lender to track independently.
Setting an industry precedent
With the impact of climate change and social inequality becoming ever more evident globally, it is our hope and belief that ESG principles will become increasingly central to investment decision-making, which in turn will drive corporate behaviours and priorities. Standard Chartered, together with eSecLending, have offered a blueprint for the wider industry to demonstrate how doing good and doing well can go hand-in-hand.
Simon Lee, managing director of business development for EMEA and APAC at eSecLending, notes: “Our role as an agent lender is to support our client requirements in the ESG space, which increasingly looks to address criteria pertaining to the collateral we hold on their behalf and the counterparties we lend to, in addition to the more familiar topic of proxy voting. Given every beneficial owner will view the subject through their own unique corporate lens, the challenge for the industry is to provide client-centric solutions that can be accommodated within the confines of agent lending programmes that by their nature have been designed to standardise as much as possible their service offering.”
Traditionally, investment decision-making has combined liquidity, risk and yield. By showing that ESG and sustainability are directly aligned with, and impact on these principles, ESG is set to become the essential fourth pillar of the investments industry.
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