- Investors – such as pension funds Nest and PGGM – and regulators are pushing for securities lending to be more transparent and sustainable.
- Investors welcome the launch of two ESG-related initiatives, with one geared towards principles and the other providing guidance.
- Asset managers such as Abrdn and NN Investment Partners feel there is room for both initiatives, despite the prospect that they could diverge.
The securities lending industry – often criticised for lacking both transparency and alignment with long-term investment principles – is under increasing scrutiny, as investors prioritise ESG and sustainability issues and start to attribute more importance to their voting rights as shareholders.
Last month, Gary Gensler, chair of the US Securities and Exchange Commission (SEC), proposed regulation “to bring securities lending out of the dark”. If passed, the rule – like Europe’s Securities Financing Transactions Regulation (SFTR), introduced last year – would require lenders to provide material terms of transactions to a public register.
Certainly, some institutions have voiced concern about how lent securities are being used – particularly when it is for short-selling purposes, a practice seen by many as at odds with long-term and sustainably focused investment. Japan’s huge Government Pension Investment Fund shocked the market in late 2019 by saying it would cease securities lending – though it is now reviewing that decision.
After all, this is a business worth as much as $10bn a year. Securities lending earned the $200bn Florida Retirement System Pension Plan $749m between 2001 and 2020. And many institutional investors – such as Dutch retirement fund manager PGGM and the UK’s Brunel Pension Partnership – feel the practice gets a bad rap and can be squared with responsible investing (see also chart below).
It is, then, none too soon that credible standards have been developed for the industry. Enter the Global Principles for Sustainable Securities Lending (GPSSL) and the largely bank-backed Global Alliance of Securities Lending Associations (Gasla), launched in September and November, respectively.
The GPSSL incorporates nine principles covering areas such as sustainable finance, tax, voting and short selling. The asset owner-driven initiative is free to adopt and already has 17 signatories.
Meanwhile Gasla – incorporating the Pan Asia Securities Lending Association, the Risk Management Association in the US, Europe’s International Securities Lending Association (Isla), and their peers in Canada and South Africa – advocates for transparent and standardised practices including the integration of ESG factors. It has launched its first document, the 'Best Practice Voting Guide', with the aim of aligning securities lending programmes with broader ESG initiatives. And it has more planned.
GPSSL and Isla's "falling-out"
The GPSSL principles were launched for consultation in late 2020 after the breakdown of the International Securities Lending Association’s (Isla) Council for Sustainable Finance (ICSF) earlier in the year.
A club of beneficial owners – including Abrdn, BlackRock, NN Investment Partners and PGGM – had started to discuss ESG in 2018, with Radek Stech, CEO of GPSSL, and Nicolas Firzli, director-general of the World Pensions Council. Most members of this group felt it should be integrated into Isla, says Roelof van der Struik, senior investment analyst and manager for treasury trading and commodities at PGGM. As a result, ICSF was formed in February last year, with Stech as chair.
But ICSF was keen to work at arm’s length from trade associations, van der Struik tells Capital Monitor. “We wanted to be able to have some friction with Isla, which is dominated by the big banks and not very beneficial owner-driven.” Of the 167 members of Isla, only 14 are beneficial owners, he adds.
GPSSL wanted to be able to challenge Isla on issues such as sustainability, van der Struik says, but that led to a “falling out” with Isla's chief executive Andrew Dyson. “There are all sorts of personalities involved," says van der Struik. "But I think the big problem is that it is financed by large institutions. They are a lobby group. They are not going to be a catalyst for change.”
GPSSL wanted to be able to challenge Isla on issues such as sustainability, but that led to a ‘falling out’ with Isla's CEO. Roelof van der Struik, PGGM
A spokeswoman for Isla says: “As a not-for-profit organisation, Isla has represented for over 25 years the common interests of all securities lending participants across the market. Following the invaluable work carried out by ICSF around ESG, we felt the operational challenges of aligning securities lending with this agenda would be best addressed through our diverse working group framework. We welcome any organisations who have similar aspirations to move the ESG agenda forward.”
Stech acknowledges the particular challenges involved in creating principles for securities lending, in that it involves stakeholders with conflicting interests, such as borrowers who want to short stocks, and lenders, such as pension funds, with long-term investment goals.
But in an open letter on 29 October, Stech made his stance clear, saying “we deliberately de-commercialised GPSSL as a not-for-profit organisation in October 2020, after two years of hard work that included a temporary home as part of a regional trade association. Now, GPSSL cannot be sold out or commercialised. This market standard is bound as accountable to the public, as I think this is the only credible way forward for this unprecedented, inclusive, global programme.”
Asset owner support
The GPSSL has support from the UK’s National Employment Savings Trust (Nest), a state-backed £22bn ($29.2bn) pension fund, one of the principles’ first signatories.
“There is a role that securities lending plays in the market in terms of bringing liquidity and price discovery,” Diandra Soobiah, Nest’s head of responsible investment, tells Capital Monitor. “It's just that we really want it to become a lot more sustainable and transparent.”
Nest currently only engages in securities lending in respect of 30% of its portfolio. It does not do so in respect of its segregated accounts, partly because it wants to see more transparency from its external asset managers on their stock lending activity, Soobiah says. Accordingly they are starting “to commit to step up a little bit more in the way they’re reporting to us”.
We really want securities lending to become a lot more sustainable and transparent. Diandra Soobiah, Nest
“[Our fund managers] were quite weak in giving us clarification and detail around what shares have been lent out and whether they’re able to recall stocks, or what the voting conditions are, who the third parties are and whether or not those securities have been used for things like short selling.”
The level of detail is improving, adds Soobiah, but "we’re still not there yet in terms of a really good level of transparency from managers". She acknowledges that they can face difficulties in providing all the information that clients might need in this area.
As a result, lending securities from its segregated accounts – given the increased number of parties involved – would have “brought an array of risks that we weren’t confident about managing and having oversight of”, Soobiah says. Hence Nest decided not to go down that route after considering it last year.
“But we will wait and see how the market develops and see what regulations do to address monitoring and reducing risk within the stewardship space around securities lending,” adds Soobiah.
Room for both initiatives?
Meanwhile, executives from asset managers such as the UK’s Abrdn and Dutch company NN Investment Partners stress the importance of a standardisation of standards on securities lending, including around sustainability.
Like PGGM, NN Investment Partners is a member of both Isla and GPSSL, while Abrdn is only part of the former. But both fund houses are sanguine on the two initiatives going their separate ways, taking the view that there is room for both.
The GPSSL looks across the whole value chain in its principles for ESG and securities lending, while Gasla adds more practicality with best practice guidance on ESG integration, says Xavier Bouthors, senior portfolio manager on the investment solutions team at NNIP. The company joined GPSSL as it feels the securities lending industry needs to move towards more ESG integration, he adds.
Matthew Chessum, investment director at Abrdn, stresses the importance of standardisation: “What is really of value to us is that sitting here in Europe we’re fully aligned with what’s happening in Asia-Pacific and we can have that rulebook apply to our whole book of business.”
Chessum also welcomes the prospect of more transparency for securities lending – something he says Europe’s SFTR brings. The regulation provides information on both sides of the transaction, enabling benchmarking and better deals, especially for beneficial owners, he adds. “We can now see both sides of the market more clearly. The spread banks are making when lending a beneficial owner assets is of particular interest.”
But the rules also bring a burden: “I still scratch my head and wonder why there are around 150 fields that need to be completed for a securities finance transaction. I can probably tell you ten off the top of my head.
“But if the [European] regulator believes that’s what is required to have a proper window into the market, then we need to supply the data,” he adds. The SEC’s proposed legislation has just 12 fields, he says, “which is a lot more reasonable and pragmatic”.
Asked whether he is concerned about divergence between Gasla and GPSSL, Chessum tells Capital Monitor: “From what I can see at the moment, Global PSSL are very focused on principles that should be adhered to by the market, which I welcome. Gasla is an alliance of regional industry associations, whose remit is wider than just ESG alone. They are collectively advocating for the development of securities lending markets more broadly, of which ESG is a component.
“As the conversation develops further, it will be interesting to see if there is more divergence between the two,” Chessum says.
In any case, he adds: “Anything that benefits beneficial owners in terms of developing consistent ESG guidance, has to be embraced."
Most investors would surely agree that two sets of sustainability-focused standards for securities lending are better than none.