HONG KONG (Reuters) – Asset managers who lend their securities should create policies using environmental, social and governance (ESG) principles for how they recall their shares for voting, and what collateral they accept, industry groups said on Thursday.
Owners of shares or other securities can lend them, for a fee, to other investors to hold them temporarily to short the stock, or for other purposes, such as hedging.
Often highly profitable for the lenders, opponents of the practice say it can conflict with ESG investing, an increasingly important trend that accounts for investment worth tens of trillions of dollars.
Major concerns are that asset owners who have lent their shares could be unable to vote for policies which fit with their ESG goals at company general meetings, and that they accept securities that do not meet their ESG standards as collateral for securities they have lent.
Securities lenders should develop a recall policy based on ESG considerations in their proxy voting framework, identifying the types of resolutions on which they want to vote by company and issue, the Pan Asia Securities Lending Association (PASLA), and the Risk Management Association said in a series of guidelines published on Thursday.
They should also establish what collateral they would accept, and consider applying the same standards around collateral that they use when making investments, the guidelines added.
“All investment products need to start thinking about ESG,” said Paul Solway a PASLA director.
While imposing restrictions on how shares can be lent would affect how easy it would be to find borrowers, and the returns asset managers would generate from lending, “it is about finding that balance, and identifying the commercial and viable options,” he said.
Japan’s Government Pension Investment Fund, the world’s largest pension fund, stopped lending its overseas shares for short-selling in late 2019, calling the practice inconsistent with its responsibilities as a long-term investor.
A PASLA survey last year found market participants thought securities lending could be compatible with ESG investing.