Reflections of the CEO

Global Alliance of Securities Lending Associations (GASLA) | COP26

As we approach the end of 2021, I am delighted to see further signs of normality begin to return to corporate life, with my first overseas business trip since February 2020.

Last week, I had the privilege of chairing the ISLA-led panel at the G20 World Pensions event in Paris, where our session considered the challenges of aligning securities lending with the rapidly developing sustainability agenda. Whilst I will come back to the subject of sustainability momentarily, the opportunity to debate issues face-to-face with my panel of industry experts, was something that I had very much missed, making the overall experience and debate much richer.

In previous blogs, I have highlighted how the sustainability agenda will be the single biggest influence on our lives for the foreseeable future. Events this week at the COP26 Summit in Glasgow, only serve to underline the urgency for action at both a personal and professional level in order to protect future generations.

Financial markets cannot not be immune to this fundamental shift in sentiment and investor behaviour. As we look at sustainability through the lens of securities lending, it is clear to me that our markets have a crucial role in providing market liquidity, efficient price discovery and transparency for investors. However, we do have to acknowledge that as our markets adapt to these developing and changing dynamics, there are some natural tensions that need to be addressed. For instance, much has been said about active stewardship, voting and its so-called incompatibility with securities lending. In our joint Allen & Overy white paper entitled, ‘Framing Securities Lending for the Sustainability Era’, we explore how our markets should address these critical issues, including how the development of standards or best practice will provide the certainty our industry is looking for.

If for a moment we look towards regulatory regimes such as MiFID, SFTR or CSDR, guidance comes through legislation. For these rules-based regimes, adherence whilst often more complex and expensive, is relatively straight forward. Similarly, non-compliance is relatively easy to determine and is often accompanied by a hefty fine. The sustainability landscape however, is not that straight forward. Sustainability by its very nature is a values-based ethos, with at times many different interpretations of the same outcomes. Not unexpectantly, this presents considerable organisational and structural challenges for institutions who are used to dealing with the implementation of simple rules. In our markets, collateral is an area that has attracted considerable attention. Without any real regulatory clarity, it is not clear at this point if collateral should be in scope from a sustainability perspective or not. The very essence of collateral is to provide a lender with a mitigant against loss, if the on-loan security fails to reappear from the borrower. That lack of clarity means that lenders naturally opt for a cautious approach and demand that collateral matches the investment of the underlying fund as closely as possible. This in turn could reduce the pool of available collateral to the market, driving inefficiencies and increasing the cost of borrowing securities.

The absence of regulatory clarity and the need for market wide standards was one of the key messages that came out of the panel discussion last week, and echoes much of our previous work in this area. Whilst we welcome the announcement by the IFRS Foundation Trustees at COP26, of the formation of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs, we must be mindful that the lead time of this forum to produce something that is both meaningful and useable, could be lengthy. Those of you familiar with the work of the original FSB work streams will recall that workstream 5 that recommended the development of mandatory reporting of SFTs in 2012, only saw tangible outputs in the form of SFTR some eight years later.

In the interim, it is therefore incumbent on bodies such as ISLA to work with the industry and wider stakeholders to help provide that clarity. Traditionally, ISLA has done that through the development of best practice standards that represent the consensus views of our members. Sustainability is no different, but we have seen a greater need to apply this approach on a global collaborative basis for certain issues where the challenges are often common across jurisdictions and regions. Consequently, we were delighted to announce the formation of the Global Alliance of Securities Lending Associations (GASLA) in recent communications. GASLA provides a single global platform to allow the founding associations to speak with one voice on important topics such as sustainability. To coincide with the official naming of GASLA, the Alliance has also published its first Best Practice Voting Guide, a paper on voting practices and shareholder engagement. This paper is the first in a series of best practice guidance that GASLA will be issuing over the coming months to deliver the clarity that our collective memberships are demanding, but also to provide a platform for further engagement with the regulatory and policy communities.

Andrew Dyson, CEO

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