In the file: Securities Lending | Job interviews

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Responsible Investment takes time priority
As investors, we are committed to our stewardship guidelines, which we refer to as responsible securities lending. However, the decision to borrow securities is made by our customers.

At the end of 2020, we went live with our securities lending program. All net income from securities lending, including dividends and coupons from securities loaned, will benefit customers in the respective sub-portfolios.

Brunel himself does not sell short. However, we have a manager, a mandate within one of our sub-funds, who is short selling, but only quantitatively, based on valuations.

Stock lending has liquidity advantages for the proper functioning of the market and we focus on the need to maximize our clients’ revenue in line with their own long-term goals. We try to maximize these benefits while minimizing the potential for problems. We hired Minerva Analytics to support our stock lending program so we could take action like recalling stocks.

So far, our securities lending supervisory actions have been predictive rather than reactive. We only recently started our stock lending program, but our political position is pretty clear. If there is a mismatch between the economic benefits of stocklending and meeting our Responsible Investment Commitments, the latter shall prevail.

Specifically, our securities lending policy states that if there is a perceived compromise between the economic benefits of securities lending and Brunel’s ability to meet its obligations as a responsible long-term investor, the latter takes precedence.

Roelof van der Struik

The positive ones predominate Negatives
PGGM’s pension fund customers do not sell short. However, the company offers its pension customers the option of securities lending. It is up to the individual customer whether securities lending is an instrument he wants to use. Five equity and three bond portfolios with total assets of around EUR 90 billion are currently being lent through the PGGM securities lending program.

At PGGM we take our role as a responsible investor very seriously. As a result, we keep asking ourselves whether stock lending is an activity that should be carried out by a responsible investor.

Stock lending is contrary to certain activities that a responsible investor would normally engage in.

When there is a good responsible investment policy in place, stock lending and responsible investing do not seem to be mutually exclusive. But, as with anything, a responsible stock lending program requires a certain amount of knowledge and caution. It’s also important to understand that stock lending may not be compatible with certain funds or portfolios.

When it comes to index funds, there seems to be no reason against stock lending. Indeed, the stock lending income could be an important contributor to the fund’s outperformance.

Conversely, when a fund invests in a handful of names chosen for their quality and ESG excellence, stock lending can create awkward situations.

Of course, this does not mean that the fund manager should ignore short-term information about the companies he invests in or that he should never lend. It could simply mean adopting the “no lending unless” attitude rather than what is summed up as “always lending if not”.

In 2009 the UK’s Financial Services Authority, then known as the Financial Services Authority, published an influential discussion paper on short selling. We believe the conclusions are still valid today. The paper argued that short selling generally increases market efficiency but can have negative effects. He highlighted the cases where the risk of negative impact is increased, such as in times of extreme market turmoil or with companies dealing with rights issues.

In the paper, the agency also noted that restrictions on short selling could be targeted at affected sectors. This practice was common at the time among UK financial sector firms, which were particularly hard hit by the credit crunch. However, the FSA said that the positive benefits of selling short outweigh the negative effects in most cases.

In PGGM’s experience, stock lending has so far not created any problems with responsible investing. If so, we agree that responsibility always takes precedence over the benefits of stock lending.

PGGM has a stock lending policy that clearly sets out the rules for getting involved. PGGM also has voting, tax and collateral policies to ensure there is no confusion around stock lending and responsible investing.

Interviews by Carlo Svaluto Moreolo


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