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Beyond Mechanics: The Intersection of

Securities Lending and ESG Investing

Bridget Realmuto LaPerla Travis Whitmore
Head of ESG Research, State Street Associates Securities Finance Research, State Street Associates

Introduction 2,300 signatories with more than $86.3 trillion in assets
under management⁵⁶.
In early December 2019 one of the world’s largest
pension funds announced that it “decided to suspend In this editorial, we attempt to form a perspective on
stock lending until further notice¹.” the intersection of ESG investing and securities lending
based on academic findings. After an extensive literature
This is one example of a growing number of asset review, there are four main findings we cover:
owners evaluating their securities lending practices
due to environmental, social and, governance (ESG) • Empirical evidence supports foundational
concerns as long-term investors². assumptions in financial theory, which suggests
that short selling, facilitated by securities lending,
Concerns have been raised that short sellers improves market efficiency and allows for the
(borrowers) could potentially undermine long-term proper allocation of capital.
stewardship efforts by mispricing or not considering
ESG characteristics³. • Increasing number of regulations and investor
demands are driving the adoption of sustainable
The immediate impact of these events on the world’s investment strategies.
lending supply was limited. For context, in June 2019,
global on-loan balances were around $2.45 trillion • Lenders have attempted to integrate ESG but,
USD, representing a small proportion of the $18.47 with fewer examples of borrowers with ESG
trillion available within lending programs⁴. However, as investment philosophies, some lenders are
the number of asset owners with these ESG related concerned about the potential negative impacts
concerns grows, the lending supply may further decline. on their long-term ESG stewardship efforts due
And, between 2018 and 2019 the UN’s Principles to borrowers mispricing these characteristics.
for Responsible Investment (UNPRI) reported a 16%
increase in the number of asset owner signatories • While research indicates that short selling does
committed to ESG investing, bringing the total to over not destroy a company’s long-term value, the
relationship between short selling and material
¹Leo Lewis and Billy Nauman (2019). Short sellers under fire from ESG performance is unclear.
investment boss of world’s largest pension fund, Financial Times
²Leo Lewis and Billy Nauman (2019). Short sellers under fire from
investment boss of world’s largest pension fund, Financial Times ⁵UNPRI.org. (accessed February 10, 2020).
³Henderson, R., Serafeim, G., Lerner, J. and, Jinjo, N. Should a Pension Fund ⁶We define “ESG investing” as the practice of systematically integrating
Try to Change the World? Inside GPIF’s Embrace of ESG. (2019) ESG and climate finance concerns into an investment process, which is in
⁴International Securities Lending Association (ISLA) Annual Report. (2019) line with the UNPRI and the leading research cited in this paper.

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