How green is your market?

Analysis of the impact of GASLA’s update to the Global Framework for ESG and Securities Lending, how far Asian lenders have integrated ESG into their collateral guidelines, and progress towards data standardisation and availability.

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: Assess or develop a policy for recalling loaned securities based on ESG considerations in a proxy voting framework; identify the types of material shareholder resolutions on which they want to vote by company and by issue, also taking into consideration other fiduciary duties, including revenue generation for underlying

• Non-cash collateral, cash reinvestment and reuse: While ESG-related risks should be considered in all aspects of an asset owner or managers’ investment portfolio, it should be recognised that collateral guidelines should also be adequately diversified with a key aim of properly mitigating credit risk, as well as ensuring collateral is liquid and can be realised in the event of default

• Lending over record date: Securities lending activity across multiple jurisdictions can result in different tax obligations for the various participants in the lending - lenders should ensure compliance with the spirit as well as the letter of the law for tax-related regulations and initiatives across global jurisdictions

• Facilitating participation in short side of the market: Where securities are borrowed to cover short selling, which is recognised globally for its contribution to price discovery as well as healthy and liquid markets, borrowers should pay close attention to regulatory requirements in different jurisdictions with regards to the disclosure requirements for short positions

• Transparency in the lending chain: GASLA’s objective is to ensure that regulators and issuers have access to the transparency about securities lending that they require - lenders, via their agents, can consider implementing effective minimum standards, reflecting their corporate level sustainability framework, with respect to selecting their direct counterparties, thereby embedding their ESG policies into their ‘approved’ borrower lists

Touchpoint commentary

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

“We are excited to be launching this update to the framework at the time of our conference in Tokyo,” said Paul Solway, director and communications officer at PASLA. “This is the product of extensive research and dialogue by GASLA’s member associations, distilling the latest thinking on how the securities finance market can approach ESG considerations, which are critical to all financial institutions. We are proud that we have been able to converge on a single framework for the industry globally and look forward to learning more about its value to our members.”

According to Yuka Hasumi, head of EquiLend Japan, there is increased understanding of the compatibility between securities lending and ESG – in other words, how ESG can be harmonised to co-exist in the investment strategies of firms.

“We have seen some global custodians establishing an ESG-aware commingled cash collateral reinvestment strategy in their agency lending programmes, for example,” she says, adding that PASLA’s work in this area has been important in terms of providing best practice guidelines.

“Aligning the universal drive toward ESG solutions by conducting panels and discussions on a regular basis has driven the agenda forward and guidance will continue to evolve to reflect requirements across local and international markets.”

ESG remains a challenge for many beneficial owners. There is a growing distinction in approaches at a regional level and given its importance to a company’s strategy and competitive advantage, a lack of standardisation can sometimes cause challenges.

Any market guidance is helpful in this space as it provides guard rails and confidence that these ideals can be fully integrated in an efficient and cost-effective manner. Regulators will also like the fact that the market is looking to essentially self-regulate in this space and make positive changes.

Different views

That is the view of Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence, who says while standardisation can be achieved, it is important to also acknowledge that each beneficial owner will view ESG through a slightly different lens.

“As the conversation evolves, so do the number of tools and data points available to market participants to help them to achieve their ESG objectives,” he says. “There is a raft of data points now available to all market participants. The question for the securities lending community focuses on how lending agents are evolving their offerings to be able to support a client’s ESG objectives, and how their range of product offerings fit with client’s needs.”

A fully segregated lending model allows clients to manage collateral effectively as per their own ESG criteria observes Adnan Hussain, head of agency lending & liquidity services, markets & securities services at HSBC.

“Recalls for proxy voting are common in some APAC markets, such as Australia –where funds (for example, pension funds) are expected to be more actively involved in voting - particularly on ESG concerns,” he says.

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, Hussain suggests how they lend their securities for additional yield and comply with their sustainability goals comes down ultimately to governance and resources.

“Supporting clients to reduce their greenhouse gas emissions is a top priority for us and we have committed to aligning the financed emissions from our portfolio of customers to net zero by 2050 or sooner, in line with the Paris Agreement goals,” he adds.

Reiterating activities

Simon Lee, managing director, head of business development EMEA & APAC at eSecLending reckons that for the majority of market participants, the updates to the GASLA framework are for the most part a reiteration of many key tenets of their existing activities.

“For those institutions we don’t see material change to their participation or programme structure,” he says. “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.”

When asked whether there are there sufficient resources available to clients to enable them to determine whether their agency securities lending programmes are complying with their sustainability goals, Cowan acknowledges that each client’s ESG goals are likely to be different.

“From a securities lending perspective, any new restrictions or programme requirements will need to be hard coded into the operating processes of the lending agent,” he says. “This is something that lending agents have been doing for many years and should already be part of best practice.”

Cowan also refers to the importance of PASLA’s work in this area in terms of providing best practice guidelines.

“Industry-led guidance and thought leadership in this space is essential to ensure that the market pulls in the same direction,” he says. “Coordination on a global level is also invaluable as most clients have lending programmes that span more than one geographical zone.”

In December 2022 ASIFMA released the results of its green taxonomy survey, the first ever report of its kind which aimed to make observations of common themes and issues identified with taxonomy adoption and implementation in sustainable finance in Asia Pacific and beyond.

The survey was aimed at banks, and respondents were predominantly multinational banks headquartered in Europe or America operating in Asia Pacific, with a smaller number headquartered in China and Japan.

Taxonomy discussions

At the time of conducting this survey, several regional Asia Pacific taxonomies were under discussion or consultation, such as the ASEAN, Australian, Thailand and Singapore GFIT taxonomies.

“Taxonomy adoption and implementation are gathering pace in the Asia Pacific region,” said Diana Parusheva-Lowery, executive director and head of policy and sustainable finance at ASIFMA. “It is becoming an industry - and perhaps soon to be a regulatory - imperative to have common externally mandated definitions of green economic activities for corporate reporting standards, product labelling and possibly other purposes.”

Some of the key findings of the survey were:

• The majority (75%) of survey participants had started using a taxonomy - the EU taxonomy of sustainable activities was the dominant taxonomy, with three quarters of respondents indicating they had adopted it

• Two thirds of respondents indicated they had adopted a taxonomy for the purposes of disclosure and reporting alignment

• The availability, quality and reliability of data was identified by survey participants as the key difficulty in taxonomy implementation, followed by lack of clarity in taxonomy definitions with participants indicating difficulties with interpretative questions about the scope of the taxonomy

• Almost all survey participants anticipated implementing a blended scenario taxonomy operating model to create an internal standard

Beyond regulatory obligations, most participants indicated that issuer, borrower or investors’ expectations would be the key consideration in determining which taxonomy they would use.

“The survey results indicated participants are making concerted efforts to ensure readiness and to support this endeavour,” added Parusheva-Lowery. “However, there remain opportunities for bodies such as ASIFMA to facilitate the adoption and implementation of taxonomies and to further the sustainability and climate agenda.”