Lending equities to brokers, hedge funds and other market participants shouldn’t interfere with shareholder voting, according to a top European institutional investment house.

“We believe securities lending is essential for well-functioning and efficient markets and does not interfere with shareholder engagement with the right processes in place,” Xavier Bouthors, senior portfolio manager, treasury at NN Investment Partners, told Global Investor.

Faryda Lindeman, senior corporate governance specialist at the firm, added: “At NNIP, the environmental, social and governance (ESG) team actively collaborates with the securities lending team to recall and restrict securities from lending to protect voting rights, AGM participation and engagement. Strategic positions would also be restricted from securities lending.”

NN Investment Partners, the asset management arm of Netherlands-based NN Group, manages €240 billion (£213 billion) worth of assets.

The company picked up a top score on July 24 for its strategy & governance approach to responsible investing and ESG integration.

The A+ score was awarded by the Principles for Responsible Investment (PRI), underlining NN IP’s performance.

“We need to keep moving forward as we cannot be complacent. Integrating ESG factors in investment processes is an important investment basic, but the importance of being a committed responsible investor grows, also within the PRI assessment,” said Adrie Heinsbroek, principal responsible investment at NNIP.

Heinsbroek added: “Demonstrating the ability to put your principles into action will become more and more important. NN IP engages actively with its investee companies as well as exercises its voting rights in accordance with our investment beliefs.”

On July 15, an article in the Financial Times looked into accusations of empty voting - where investors borrow voting shares for short periods to swing the outcome at meetings - specifically ahead of London-listed Premier Food’s shareholder meeting.

Speaking to Global Investor, the International Securities Lending Association (ISLA) said the following: “ISLA takes the issue of strong corporate governance very seriously and we increasing recognise its importance in the context of the broader ESG debate.

“ISLA has never condoned the practise of borrowing securities for the sole purpose of voting.”

The London-based trade body pointed to Chapter 4 Section 6 of the UK Money Markets Code, published in April 2017.

Paragraph 6.2 specifically states: “It is accepted good practice in the market that securities should not be borrowed solely for the purpose of exercising the voting rights at, for example, an AGM or EGM. Lenders should also consider their corporate governance responsibilities before lending stock over a period in which an AGM or an EGM is expected to be held.’”

The following paragraph 6.3 further states: “If a beneficial owner wishes to exercise voting rights, a clear instruction should be provided to their lending agent in sufficient time for the securities to be recalled in time for voting rights to be exercised. If securities are not returned in time, beneficial owners may ask their lending agent to use reasonable efforts to pass on the voting instruction to the borrower of the securities.”

Lending agents have systems or processes in place which permit them to recall shares upon their clients’ instructions, with appropriate notice.

In the US, the Risk Management Association’s Committee on securities lending has worked with the Securities and Exchange Commission (SEC) and the Federal Reserve over the years to educate on the topic.

Regulation T - Permitted Purpose rules around borrowing establishes the key permitted purposes for borrowing a stock, voting is not a permitted purpose.

“Borrowing equity securities for the purpose of controlling a proxy vote, or for the purpose of lending to customers for such purposes, could subject a brokerage firm to serious penalties,” the rule states.