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6 Securities Lending to Support More Autonomous EU Capital Markets: Priorities for the Next 5 Years

Priority 2: Empower Investors & Stimulate Good Corporate
Governance to Support the Sustainable Finance Agenda

ISLA strongly supports an ambitious EU sustainable finance agenda. We believe securities lending can play a key role Stimulate Good Corporate Governance
in making capital markets in Europe align more broadly with the ethos of Environmental, Social and Governance (ESG)
investing. Furthermore, it can help to empower investors and stimulate good corporate governance. One of the key aspects of the sustainable finance agenda is the pursuit of good corporate governance.
Empowering Investors to Demand Transparency In recent years, there have been a few cases where voting rights attached to borrowed securities were used to influence
corporate votes.
Securities lending transactions have two legs, with distinct challenges from a sustainable finance perspective:
ISLA condemns these practices and supports the Bank of England/Financial Conduct Authority’s guidance for this practice to
During the first leg of the transaction, the security is lent out by investors to banks. be disallowed, by forcing investors to recall their securities ahead of important corporate votes. We would support an EU-wide
• We concretely recommend that the investor (usually a fund) should be able to attach to their lent security, an obligation for implementation of this principle, which could be done potentially by including it in the EU’s Shareholders Rights Directive.
the borrower to use that security in line with the investment strategy of the fund. This is particularly important for ESG/impact One obstacle investors still see in complying with this principle is that firms’ Annual General Meeting agendas are often published only
investing funds, as it will reassure these funds that the securities they lend are not used to perform activities that are contradictory very shortly before the meeting itself. This makes it difficult to determine whether an important vote is taking place, which leads to
to their investment strategy. wholesale recalls of all securities. These recalls can be counter-productive when unwarranted, causing price volatility and temporarily
• Such a provision would empower investors, who would in turn have more confidence in participating in the securities lending sucking liquidity out of a market.
market, helping to increase supply.
To avoid unnecessary recalls of securities, it would be helpful if EU law would mandate firms to publish agendas of AGM’s at least one
• The other side of the transaction is the collateral return to the investor in exchange for the lent security. The industry is already week in advance. This will allow investors to assess whether there is a risk of voting manipulation with their securities on loan.
looking into developing collateral sets which will allow collateral to be matched with a lent security based on its sustainability
characteristics (“like-for-like”). Again, this is particularly important for ESG/impact investing funds, as they will be able to demand
collateral in the form of securities their own investment strategy would allow them to invest in.
Key Recommendations on Sustainable Finance:
• Although the burden should be on the industry in this case, the EU sustainable finance taxonomy that is currently being developed
will be instrumental in designing the matching collateral sets. 1 EU rules should empower investors to fully understand the role of their securities lending programmes in the context of
their broader sustainable finance strategies.
2 EU guidance and/or rules should be developed/reviewed to build in safeguards to avoid securities lending being used
to influence key votes.