Shareholder voting and collateral are the “most important” factors to consider when it comes to incorporating environmental, social, and governance (ESG) factors in securities lending, according to Dutch asset manager NN Investment Partners.

Xavier Bouthors, senior portfolio manager, investment solutions at the Goldman Sachs-owned firm, believes that ESG integration into portfolio management has triggered a review of securities lending programs' parameters.

He said: “At NN IP we see voting and collateral as the two most important ESG pillars in securities lending. Shareholder voting is an important mechanism to voice concerns and expectations to companies and engage on ESG issues. The annual general meeting gives us this opportunity, so we need to ensure our voting rights are protected and available on voting day.”

A key challenge in securities lending is to ensure the securities are back in time for firms to vote, Bouthors said.

“This requires monitoring of voting dates which may face some obstacles to have a timely source of information especially in some markets like the US. In addition, recalling all or selected securities for voting has an impact on the revenue and trade opportunities. Counterparties are looking for some balance on loan stability and will include the recall risk in pricing when borrowing from lenders.”

When it comes to collateral, Bouthors says the industry is working on more standardised ESG collateral parameters in recognition of lenders’ broadening ESG goals.

“This will facilitate a borrower’s ability to manage collateral inventory and collateral funding needs. It is also common to have lenders applying their own exclusion list to their collateral in alignment with their ESG parameters. We should keep in mind the main purpose of collateral remains risk mitigation and it should be liquid while integrating ESG standards,” he stated.

Implementing voting rules and ESG collateral standards are the natural next steps for the securities lending industry, Bouthors believes.

“But, overall, the industry has adapted well to ESG and industry trade associations such as the International Securities Lending Association (ISLA) and the Risk Management Association are setting up standards to guide market participants to successfully manage ESG securities lending programs," he added.

Earlier this month, ISLA warned that firms should not underestimate the “reputational damage” to the securities finance industry of borrowing shares to vote at an annual general meeting, following the Bank of England’s securities lending committee discussion in May of an instance where a firm borrowed shares to vote at an AGM.

In January, NN IP said it does not hold natural gas firms within its green bond funds and that the European Commission's announcement on December 31 to include natural gas and nuclear in the EU Taxonomy will not change this.