Environmental concerns

An update on how ESG considerations are affecting securities lenders and borrowers across the Americas.

This article is part of the 2023 Americas Securities Finance Guide, which can be accessed here.  

In March 2023 the Global Alliance of Securities Lending Associations (GASLA) released an update to the global framework for ESG and securities lending. The new framework updates the first version, which was released by the Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) in May 2021 with the support of the International Securities Lending Association (ISLA) and provided the first practical guidance on how securities lending market participants could approach ESG issues in their businesses.

It provides insight into key considerations across the five main touchpoints between securities finance and ESG:
• Voting rights
• Collateral
• Lending over record dates
• Facilitating participation in the short side of the market
• Transparency in the lending chain

The framework also offers commentary on the legal and regulatory context for each touchpoint as well as practical guidance for lenders.

“CASLA firmly believes in the collective ambition set out through the framework,” said Mary Jane Schuessler, president of the Canadian Securities Lending Association (CASLA). “Following extensive dialogue with our fellow industry participants, it presents a unified and global framework for industry stakeholders when considering the integration of ESG policies into well-functioning securities lending programmes.”

Fran Garritt, director of securities lending, market risk and credit risk at RMA noted that the revised framework incorporates global considerations and best practices that have evolved since the initial release in 2021. “In a fast-moving environment, the framework is an important resource for participants in the securities lending market as they seek to integrate ESG considerations into their activities effectively,” he added.

Subjective interpretation 

In the absence of explicit regulation covering the application of ESG tenets when entering into securities financing transactions, the interpretation and application of ESG tenets into a securities lending programme can often become subjective observes Ross Bowman, global head of agency lending client management, securities services at BNP Paribas.

The global framework for ESG issued by GASLA provides clear guidance to all securities lending market participants and covers the key elements of a securities lending transaction that lenders should consider when applying a wider internal ESG investment policy to their securities lending programme.

“The framework is designed to be reviewed and, where needed, incorporated into decisions taken to commence or continue securities lending activity and represents a clear and positive step forward to aid the decision making process of securities lenders,” says Bowman. He adds that securities lenders have long been able to tailor and customise their lending programmes in a variety of ways.

“Most of the customisation though has been related to credit limits, counterparty exposures and asset classes or market restrictions,” says Bowman. “As such, the implementation of restricted securities lists - both on assets being made available to lend, and those being received as collateral - together with targeted measures to ensure stock is recalled in time for specific voting situations, have always been available to lenders and often put in place across many securities lending programmes.”

ESG focus

These latter restrictions fall under the more recent investor focus on ESG tenets and how they can be applied to a lending programme. In the US, the predominant form of collateral is cash, so as market regulation develops the use of securities as collateral is set to increase, and therefore the focus on applying ESG related restrictions on the collateral taken could also increase.

According to Bowman, this is already a key talking point with securities lending clients in Europe, where collateral is predominantly in the form of securities.

“Additionally, where borrowers are often looking for supply from ‘RWA-friendly’ lenders, lenders may also begin to look at the ESG and sustainability credentials of the borrower, through the application of ESG scoring data that is currently in its infancy across the market, but set to grow.”

On the question of whether there are sufficient resources available to clients to enable them to determine whether their agency securities lending programmes are complying with their sustainability goals, Bowman notes that there is a variety of data available in the market that will help lenders obtain key information to assist them in complying with and monitoring activity in relation to their sustainability goals.

“However, the current challenge is how to consolidate the data and which data sets should be used, as not all will return the same results, as the inputs are different,” he says.

“Data accumulation is also expensive and the costs need to be weighed against the objectives and the anticipated information obtained. While ESG market data continues to evolve, the GALSA framework serves as a high level guidance to all lenders as a key starting point for the implementation of any ESG considerations to a lending programme.”

Important guidance 

Dimitri Arlando, head of EquiLend data & analytics EMEA describes the framework as clear, concise and informative with important guidance on best practise.

“At EquiLend, we strive to provide our clients with the tools they need to manage their programmes whether they have an ESG component or not,” he says. “Our ESG tools can help with some of the best practice guidance that GASLA has outlined and we would welcome a conversation with any interested participants to provide more detail.”

Last September, BNY Mellon announced new enhancements to its securities finance platform to help clients analyse their agency securities lending programme alongside their sustainability goals, driven by growing stakeholder demands for increased transparency in connection with ESG investing.

Clients can apply ESG scores based on thirdparty data across their lendable portfolio, collateral and cash investments.

“Transparency is critical to the evolution of the ESG investing landscape, as well as the management of ESG risks and regulatory compliance,” said Ina Budh-Raja, EMEA head of securities finance product & strategy and global head of markets ESG at BNY Mellon.

“For most market participants, GASLA’s update to the global framework for ESG is a reiteration of many key tenets of their existing activities and we don’t anticipate material change to their participation or programme structures,” says Betsy Coyne, senior vice president client relationship management at eSecLending.

Valuable direction

For those institutions that have not yet incorporated ESG considerations into their securities lending activities, the framework can provide valuable direction as they work through this with their service providers.

There are many North American lenders who have integrated ESG into their lending programmes. However, the majority of these lenders are more focused on proxy voting/ recalls and less so on the collateral they accept, partly due to the US regulatory requirements around non- cash collateral (where US mutual funds are restricted from accepting equity collateral).

According to Coyne, there are some pension plans with broader non-cash collateral guidelines that have elected to apply their ESG profile to the non-cash collateral they accept, although this is more of an exception than the rule among North American lenders.

“We make a comprehensive suite of resources available to our clients to ensure their securities lending activities comply with their sustainability goals,” she says. “We recognise that every client has different requirements in this regard and that a ‘one-size-fits-all’ approach is sub-optimal, hence our provision of fully segregated, individualised securities lending programmes ideally positions us to support our clients in this evolving field.”