Chair: One topic that we spent the most time debating dur­ing the EU roundtable is ESG and sustainability. I’m going to turn to you, Francesco, Michael and Justin to have your perspective on it.

Francesco Squillacioti, State Street: It’s definitely the case that we’ve seen a lot of growing interest in ESG. The US may have been lagging Eu­rope and Asia somewhat but it’s coming back strongly.

Things like proxy voting, which we touched on earlier, with respect to some of the regulation.

We are driving and our clients are driving to have a bit more surgical precision in terms of recalls, and the ability to recall and how these are effectuated. Understanding elements of what makes a vote material and having those influence or inform that recall process is certainly something that we’re getting a lot of attention among our client base.

The other big area is around collateral. We’re trying to give clients options in the cash collateral space to have a bit of a ESG flavour to what we can do with the cash reinvestment. I think more of the complexity lies in the non-cash space, where clients have different views on what would constitute ESG appropriate activities in their view. We’re trying really to translate those into collateral sets. There’s a drive to find the most efficient way to run a programme where we can help support a client’s ESG views and express those in their non-cash collateral sets, and also have that manageable so that it’s something that’s scalable across a broad programme.

Michael Saunders, BNP Paribas: I would echo the comments from Cesco. Cer­tainly, ESG is a topic on every agenda meeting, whether it’s internal or external, with clients or prospects. One of the probably continuous trends that we’ve seen is that in a lot of our discussions with beneficial owners, it’s become relatively clear that the beneficial owners themselves are in the midst of creating their own internal ESG policies. They are look­ing for some guidance in that. Now, of course, that’s a broad sweeping statement, and there are several or many beneficial owners that have a defined strategy. But what we see with clients is that they are simply in the process or in the midst of defining their own ESG criteria, and seeing how that fits into all of the other product sets that they may have, including securities lending, securities finance, collateral management, whatever it may be.

It’s about working with these clients to help them define their own internal strategies and explaining to them what can and can’t be done in today’s market. If you look at non-cash transactions, a lot of the counterparties would need to have the ability to at least refine - or the tri-party custodial banks, if you’re operating on a tri-party basis, would need to have - the infrastructure that the counterparty or tri or agent can quickly sift through the pool of available or eligible col­lateral. In theory, it almost creates a new collateral bucket, if you wanted to look at the securities financing world in that light. You would have equities and everything in one collat­eral bucket, Treasuries or government bonds in another, and then you have this third bucket that is ESG. That’s where the agent, the beneficial owner, and I would argue the counter­party in the transaction, need to have that ability to differen­tiate between that collateral. Someone used the term earlier a marriage of technology with the industry. It’d be an under­statement to say that it’s not true in when applying ESG cri­teria and standards to securities lending. I do feel, working for a European bank, that ESG is front and centre. I would imagine it’s gaining traction with a lot of the folks on this call and in your subscriber base or the audience of this article.

I’d like to think that we’ve got maybe a step or a half step ahead of maybe some of our peers or the industry, and re­ally taking that European flavour and this focus of ESG, and hopefully trying to implement that to beneficial owners worldwide, also here in the US.

Squillacioti: To touch on a good point Mike made. There could be trade-offs with ESG and securities lending. The industry is evolving to adapt to it. Some of the restrictions around collateral to encompass ESG views could mean that there could be a trade-off with revenue. We’re also trying to be clear with clients and transparent with them that as we look to implement their ESG strategies in the securities lend­ing programme, there could be knock on effects in terms of what the revenue is.

Dunn: I think the idea of standardizing ESG is a difficult one because ESG can mean different things to different peo­ple. The way one lender interprets it can be vastly different than another’s interpretation. The difficulty is attempting to identify a solution when there are so many unknowns. At the same time, you need to ensure your technology and re­sources are deployed effectively and the solution is scalable.

Fox: Amy, to your point, there are a lot of inconsistencies with regard to how various data providers grade different We’re trying to give clients options in the cash collateral space to have a bit of a ESG flavour to what we can do with the cash reinvestment. FactSet, for Tesla, for example, will have a very low score, and MSCI will have a very high score. To the point about impact, as beneficial owners define what the creden­tials are going to be for their ESG policy, it may even come down to counterparties that they feel that they need to re­strict, just because they’re falling short on some ESG princi­ples such as climate change.

Justin Aldridge, Fidelity: We largely are supporting ‘40 Act funds and our prospective customers are generally registered ‘40 Act’s. The collateral piece really doesn’t come up at this point, given that there’s not a lot of collateral flexibility for those types of lenders - it’s cash or US Treasuries and agencies. Unless those come into scope into ESG, I think it’s pretty benign for our clientele.

Ultimately, when equities become acceptable collateral (presuming that happens with 15c-3 and going forward) there’ll be some work to be done on the collateral side and what you would accept on that front. But I think that’s much easier than the fixed income instruments would be as Cesco said earlier, so our focus has really been on the proxy voting side of it.

Amy hit on this, and everyone’s hit on it: the platforms and the agent lenders just need customization because there’s no standardized approach to ESG. Every client is going to have a different view and a different lens on how they view ESG, until it’s standardized. We are offering complete flexibility with the programme. The technology stack that we have de­veloped allows us to offer high customization, where folks can change the parameters on any security based on any data market element that’s out there. We can use that to meet their needs, as they’re thinking about ESG. To complement that, we’ve created a tool for free proxy screening - another Fi­delity product called PB Optimize. It is very similar to what Monica said S&P is creating. It allows our customers to man­age their securities lending programme and really serves as governance. They can set the parameters in there to highlight the things they would like to recall and to instruct the agent. The platform is built to be able to support multiple agents. For customers that have multiple agents, they’ll be able to manage the proxy screening for all their providers and create the customization that they need. Now, maybe their provider might not be able to support that customization, but we’ll be able to derive from the calculations and the algorithms is sending a list at a bare minimum of the names that they would like to restrict based on the parameters that they de­vised. We’ve worked in partnership with many third-party data providers for market data elements, including ESG, proxy scores and confidence scores on those proxy record dates.

We think it’s very critical going forward that people need to manage this and document the decisions that they’ve made around lending, around proxy, given the new regulations that may be coming down the line.