How Stock Lending Can Work with SRI Principles

Securities lending can “coexist” with socially responsible investment (SRI) strategies, according to a new survey from the Risk Management Association (RMA).

Asset managers and other investors often engage in the lending of stocks or bonds to help others enact short selling, hedging or arbitrage strategies.

The process involves the owner of the stock temporarily exchanging it for an agreed amount of collateral. The lender usually earns a small fee while retaining long-term ownership of the security. According to DataLend, securities lending generated $8.7 billion of revenues in 2019.

However, proponents of responsible investment have opposed the practice of securities lending as the owner of the stock surrenders voting rights while it is on loan, undermining their ability to engage with companies.

The RMA’s survey of 44 asset managers and other investors found that the vast majority (95%) believed that securities lending activities could “coexist with environmental, social, and governance (ESG) principles”.

But only 18% of respondents said they always applied ESG principles to their lending programs, with 25% doing so on a “case by case” basis. More than a third (39%) said they do not apply any ESG or SRI principles.

The RMA said survey respondents cited a “lack of timely information about proxy record dates and voting questions” as complicating the process of recalling stock to exercise their voting rights.

The association’s report highlighted that lenders always had the right to recall stock in order to vote on material issues. In addition, asset managers could always restrict lending on certain positions or keep lists of securities that they do not want to lend for SRI reasons.

“Our research shows that securities lending and ESG investing can be complementary, not conflicting,” said Fran Garritt, the 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.

“The RMA believes that greater transparency and more standardized 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.”

The full report is available here.