ESG and Securities Lending Framework
The Global Alliance of Securities Lending Associations (GASLA) releases the Global Framework for ESG and Securities Lending (GFESL), aiming to provide an ESG framework for securities lenders to measure lending behaviors.
GFESL is divided into five parts, including voting rights, collateral, cross-border lending, short selling and lending chain. In combination with ESG and corporate governance rules, GASLA puts forward suggestions on these aspects respectively.
Balancing Securities Lending and Voting Responsibilities
In addition to the lending activities, the securities lender may also participate in the company’s decision-making meetings as a shareholder in order to supervise the company to complete the ESG responsibility. However, after securities are lent, lenders need to balance lending behavior and voting responsibility.
According to GASLA, securities lenders should ensure that the lending behavior will not affect their voting responsibilities, and may consider giving up the securities lending income to recover the securities when necessary, so as to exercise their voting responsibilities. Some regulators also require that securities borrowers cannot borrow securities for voting purposes, and lenders also need to disclose the number of shares that have not been recovered and their voting rights.
Implement ESG Assessment for Collateral
The securities lender can determine the collateral evaluation in the lending process. In addition to referring to the credit risk of the counterparty, the lender can also include ESG strategy in the evaluation process. For example, lends can refuse to accept relevant collateral in some negative screening industries.
GASLA believes that securities lenders should be aware that collateral is also an important part of their portfolio, which involves both credit risk and liquidity risk, as well as ESG risk to some extent. At present, there is still a lack of universal screening and classification standards around the world, so securities lenders can develop ESG strategies that meet their own standards and apply them to the assessment process.
Improve Governance of Cross-border Securities Lending
Securities lending activities based on multiple jurisdictions may cause participants to face different tax obligations and generate governance risks. Securities lenders should evaluate the lending plan and accept tax advice in order to reduce ESG risk.
Regulators in various regions have required participants in securities lending activities to implement a robust governance framework in order to identify, prevent and report potential tax risks. The EU cross-border tax directive and the OECD multilateral tax convention can solve these risks. Securities lenders should understand these tax rules and complete cross-border lending transactions.
Promote Regulated Short Selling
As a common market behavior, short selling can also serve for ESG in the following aspects:
- Short selling can be used to hedge the ESG risks faced by the portfolio;
- Short selling can encourage enterprises to change their governance behavior;
- Short selling can expose fraudulent actions including greenwashing;
Regulators in various regions have begun to build governance frameworks and reporting rules around short selling. The European Union has formulated the EU Short Selling Regulation to regulate short selling. The Hong Kong regulatory authority requires short sellers to borrow securities in an unprecedented need to sell. These regulated short selling behaviors can provide effective ESG management tools for financial markets.
Improve the Transparency of Securities Lending Chain
In most financial markets, participants in securities lending are regulated financial institutions, so their lending behavior may be subject to ESG requirements of stakeholders. However, once the securities are lent, the former securities holders will no longer have control rights, and the transparency of follow-up information cannot be guaranteed, which brings difficulties to the implementation of ESG policy.
National regulators are improving the transparency of the securities lending chain. For example, the Securities Financing Transaction Regulation of the European Union requires that securities holders provide information disclosure after lending securities. Some regulators in Asia require securities lenders to include ESG policies in the list of borrowers.
GASLA believes that it is essential to ensure the transparency of the lending chain for regulators and securities holders. Securities holders can transmit information to the agency according to their own policies and risk assessment, so as to enable counterparties to comply with ESG standards.