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ESG characteristics are being considered throughout Can ESG Investing and Securities performance by shorting poorly ESG ranked stocks (as a
the investment landscape. For example, recently Lending Co-Exist? proxy for ESG performance), relative to an ESG-screened
Goldman Sachs announced that they will not “take a long-only strategy (or long/short ESG-screened strategy).
company public unless there is at least one diverse To some extent, investors are already integrating ESG Mirroring the ESG concerns and views on stewardship of
board candidate²⁸.” metrics into their lending (borrowing) strategies. long-term ESG beneficial owners (lenders), these short
We know this through Harvard case studies and public positions exert pressure on the corporate boards of
These efforts are extensions of empirical research reporting to UNPRI. Asset owners currently exercise companies with poor ESG rankings, as boards are aware
revealing that investors are focusing on material “E,” “S” their shareholder rights by recalling securities on loan of the percentage of their stock being shorted. While
and “G” metrics. Leading frameworks, most notably the or by setting a threshold on how many shares can be not a prevalent approach for borrowers, this sheds light
Sustainability Accounting Standards Board identifies on loan at a given time. For example: some Swedish on how long-term ESG investors can take part in the
material ESG metrics as meaningful to the financial or asset owners have instituted a policy of recalling all securities lending market.
operational performance of a company²⁹. securities on loan prior to annual general meetings,
some Australian asset owners recall domestic securities
In Serafeim’s foundational paper, ‘Corporate on loan to vote prior to key votes, and some French Conclusion
Sustainability: First Evidence on Materiality’, he and asset owners limit the percentage of a holding on
his co-authors, Mozaffar Khan and Aaron Yoon studied loan to 90% when a vote is considered to be “high Empirical evidence indicates that short selling, facilitated
novel materiality sustainability characteristics to impact³².” Shareholders looking to communicate their by securities lending, improves market efficiency and
discover value implications of ESG investments³⁰. To views on a company’s performance and governance market liquidity. A holistic view of academic studies
understand how public sentiment has changed over regarding material metrics vote on key themes and suggests that constraints on short selling can lead to Travis Whitmore
the years, in 2018 Serafeim found that the valuation engage with companies on those themes. The demand overpricing. This alleviates concerns of short-termism
premium of strong material ESG performance has for transparency from some long-term investors stemming from time horizon misalignment of short
increased over time, as a function of “positive public (lenders) stems from thinking about “fiduciary duty sellers with long-term ESG investors. Leveraging Travis Whitmore is a quantitative researcher
sentiment momentum³¹.” across generations,” which raises concerns that empirical ESG and climate finance research, we know in the Securities Finance Research team at
lenders are undermining their own long-term ESG that investors are using material ESG metrics in their State Street Associates (SSA), State Street’s
Alpha was recognized through the creation of a “low stewardship efforts by loaning stocks to borrowers who investment decisions to improve their risk/return academic arm. Since joining SSA in early 2018,
sentiment ESG factor,” designed to identify firms potentially disagree with (or ignore) the value of those profiles. An increasing number of lenders, and some Travis has helped develop and apply numerous
improving ESG performance with low public sentiment. ESG characteristics³³. These lenders hold companies borrowers apply these characteristics when considering quantitative models and contributed to several
This research found that public sentiment on ESG has responsible for key ESG characteristics in an effort to what they loan (borrow) and to whom. thought leadership pieces within the securities
indeed changed and that this perception influences improve performance over time. lending market.
investor views on the value of ESG performance. This We do not yet know the impact that short selling
ESG investing literature and our climate finance research Currently, lender to borrower transparency is limited due has on a company’s material ESG performance in the Prior to SSA, Travis worked in State Street Global
suggest that investors are increasingly incorporating to privacy agreements between brokers and borrowers. long-term. New insights will come from studying the Markets as part of their rotational leadership
material ESG characteristics into their investment ESG investors lending stocks may appreciate information changing dynamics between lenders and borrowers program, wwhere he developed collateral
decisions and diving deeper into these characteristics about the borrower or request ESG collateral of those and the potential impact on a company’s material ESG optimization models for the Funding and
with company fundamentals. borrowing their stocks. These requests and the solutions performance. Through systematic empirical research, Collateral Transformation trading desks and also
could take many forms and may change the pricing of we may find ways and opportunities for the securities built out an award winning application to help
the stock being lent. While limited literature exists on lending market to evolve and potentially grow. We mitigate fraudulent behavior.
²⁸“The CEO of Goldman Sachs Says the Bank Won’t Take Companies Public borrowers integrating ESG, a recent paper published by look forward to approaching these questions and
Unless There is at Least One ‘Diverse’ Board Member.” (January 23, 2020).
Forbes.com AQR, illustrates a borrower’s perspective on ESG short- continuing to apply a rigorous data-driven approach Travis interned with Morgan Stanley and several
²⁹erafeim, G. (2018). Public Sentiment and the Price of Corporate selling opportunities³⁴. This borrower looked to improve to understanding this space. technology startups before he graduated from
Sustainability. Harvard Business School. Working Paper.
³⁰Serafeim, G. (2015). Corporate Sustainability: First Evidence on the University of Vermont with a Bachelor of
Materiality. The Accounting Review. ³²UNPRI Practical Guide to Active Ownership. (2018). UNPRI.org. ³⁴Palazzolo, C., Pomorski, L. and Fitzgibbons, S. (2018). Hit ‘Em Where It Science in Computer Science and Finance.
³¹Serafeim, G. (2018). Public Sentiment and the Price of Corporate ³³Henderson, R., Serafeim, G., Lerner, J. and, Jinjo, N. Should a Pension Fund Hurts: ESG Investing 2.0. Investments & Pensions Europe.
Sustainability. Harvard Business School. Working Paper. Try to Change the World? Inside GPIF’s Embrace of ESG. (2019) Click here for disclaimers and important risk information

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