ESG investing and securities lending can coexist, says RMA survey

A new survey of leading institutional investors by The Risk Management Association (RMA) has revealed that 95 per cent of respondents believe that securities lending activities can coexist with Environmental, Social, and Governance (ESG) principles. 

It also found that securities lending needs to evolve in order to integrate investors' ESG principles with their securities lending programs – and highlighted the opportunity for the industry to help asset owners better understand their options for managing ESG factors in securities lending.

The survey was published as part of "Complementary, Not Conflicting: Securities Lending and ESG Investing Coexist," a white paper that is the product of a wide-ranging effort by RMA's Council on Securities Lending to capture best practices and identify challenges in harmonising ESG goals with securities lending strategies.

"Our research shows that securities lending and ESG investing can be complementary, not conflicting," says Fran Garritt, RMA's Director of Securities Lending and Global Markets Risk. "This paper shows how this important balance can be achieved – and is being achieved. It also identifies the challenges for the securities lending industry in further integrating ESG factors into securities lending programs. RMA believes that greater transparency and more standardised processes will benefit everyone who uses the securities lending market. We will continue to work with all market participants to ensure the market's continuing compatibility with ESG investing, which continues to gain momentum."

To inform the paper, the Council held detailed interviews with nine institutional investors and surveyed 44 firms. Respondents included five of the top 10 global asset managers, two of the top 10 US retirement plans, and two of the top five global sovereign wealth funds. The priorities highlighted by the paper include the need for engagement with portfolio companies as a means of expressing ESG principles, the importance of proxy voting, questions concerning participation in the short side of the market, and the benefits of lending to shareholders and other stakeholders.

Ninety-five percent of survey respondents said ESG investing and securities lending can coexist. But only 18 per cent always apply ESG principles to their securities lending programs. Another 25 per cent do so on a case-by-case basis, 18 per cent don't but are planning to, and 39 per cent simply don't.

A lack of timely information about proxy record dates and voting questions complicates the process of recalling stock that is on loan. When survey participants were asked to name "measures that might facilitate the application of ESG principles to their securities lending program," 43 per cent said that they want more transparency around proxy record dates and questions.

Just 20 per cent of respondents said that there is "regular" interaction in their institution between those who manage securities lending and those who manage ESG issues. Another 44 per cent responded that interaction occurs "from time to time."

Fifty-five per cent of participants ranked "greater education about available options" as the top priority when it comes to applying ESG principles to their lending program.

"RMA is making this paper available at a time when ESG is taking on greater importance in securities lending, which generated USD8.66 billion for lenders in 2019 at the same time as serving its customary function of enhancing liquidity, the availability of collateral, and efficiency in the markets," says Glenn Horner, Chair of RMA's Council on Securities Lending. "With climate change, Diversity, Equity, and Inclusion efforts, and regulations around data privacy taking on more significance daily, ESG will only become more integral to every institution."