Institutional Investors Say ESG Factors Can Be Applied to Securities Lending

Securities lending might be part of a defined benefit (DB) plan’s investment strategy.

Securities lending is a way for institutional investors to generate incremental revenue for their portfolios by lending out their securities for collateral. Securities lending also provides DB plans more liquidity than other securities.

A survey of leading institutional investors released by the Risk Management Association (RMA) revealed that 95% of respondents believe securities lending activities can coexist with environmental, social and governance (ESG) principles. The survey results were released after the Department of Labor (DOL) unveiled its recently proposed rule that aims to ensure retirement plans’ ESG investing strategies are based on financial factors.

Fifty-five percent of survey participants ranked “greater education about available options” as the top priority when it comes to applying ESG principles to their lending program. When survey participants were asked to name “measures that might facilitate the application of ESG principles to their securities lending program,” 43% said that they want more transparency around proxy record dates and questions. A lack of timely information about proxy record dates and voting questions complicates the process of recalling stock that is on loan, RMA says.

The survey found only 18% of institutional investors always apply ESG principles to their securities lending programs. Another 25% do so on a case-by-case basis, 18% don’t but are planning to and 39% do not apply ESG principles.

Just 19% 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% responded that interaction occurs “from time to time.”

RMA has produced a paper, bringing together the questions that institutions need to ask and insights into existing best practices to help investors craft a securities lending strategy that is best suited to their ESG goals and risk appetite. The paper addresses short selling, the need for engagement with portfolio companies in order to follow through on ESG principles, the importance of proxy voting, implementation challenges and other considerations.

“RMA is making this paper available at a time when ESG is taking on greater importance in securities lending, which generated $8.66 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.”