Asset managers lending to short-sellers can be ethical: study

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HONG KONG (Reuters) – Asset managers lending out of their securities can be compatible with investment on environmental, social and governance (ESG) principles, an industry body said on Thursday, adding it was working on drawing up guidelines.

Owners of shares or other securities can lend them, for a fee, to other investors who wish to hold them temporarily to short the stock, or for other purposes, such as hedging.

Often highly profitable for the lenders, opponents of the practice say it can conflict with ESG investing, a trend that accounts for investment worth tens of trillions of dollars.

A Pan Asia Securities Lending Association (PASLA) survey of its members found 89% of respondents said that securities lending could be compatible with ESG principles, if certain measures were put in place.

“There are three core topics that normally come up: proxy voting, collateral and transparency,” Stuart Jones, PASLA’s chairman, said.

These cover whether and how asset owners should have their shares returned to them to allow them to vote at AGMs, what collateral they were given in exchange for the shares – in case these did not meet asset owners’ ESG requirements – and whether borrowers of shares could lend them on further without informing the owner, Jones said.

“A lot of people – but certainly not all- have not considered what ESG needs to look like when lending securities,” Jones said. PASLA is working with the industry to create a set of ESG principles.

Japan’s Government Pension Investment Fund, the world’s largest pension fund, last year stopped lending of its overseas shares for short-selling, calling the practice inconsistent with its responsibilities as a long-term investor.

Asset managers earned more than $10 billion in 2019 from charging fees to borrowers of their securities, IHS Markit found.