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Even though vast numbers of market participants talk passionately about implementing ESG policies, there is not one definition for what ESG actually is. This confusion is not helped by the growing volumes of competing and inconsistent ESG standards (e.g. the Financial Stability Board’s [FSB] Task Force on Climate Related Financial Disclosures [TCFD]; the UN’s Principles for Responsible Investment [PRI]; the UN’s Sustainable Development Goals [SDGs]; the EU’s incoming ESG taxonomy; the COP 25 principles, etc.). As there is no fixed, or widely accepted standard, ESG data can be used subjectively, which leads us to suggest investors ask a lot of questions to get comfortable with ESG investments while the industry works towards standardization.
“It is true that there are no universal ESG standards. Until then, we engage closely with our clients to structure ESG portfolios. DWS has done the homework to ensure our designated ESG strategies will hold up to scrutiny” says Cooke. Although ESG standards are quite interpretive, the securities lending industry has made impressive strides. Santoro says, “ISLA has established the ISLA Council for Sustainable Finance (ICSF), which will launch in Q1 2020. As part of this initiative, ICSF will introduce its Principles for Sustainable Securities Lending (PSSL), a voluntary sustainable finance mechanism for the securities lending industry”.
As well as standards, banks are liaising closely with clients to ensure they are educated about ESG. “We are in the various stages of education and building awareness about ESG with our clients,” says Kendrick- Smith. Cooke concurs, “We are well equipped to add value at any stage of this process. We have seen some early investors focus on one element of the Environmental, Social or Governance; at DWS we believe incorporating all three makes the most sense”.
Ryan adds, “Adjusting securities lending policies and practices has traditionally been handled on a one off basis and not part of a specific strategy or overlay. Establishing ESG compliance will help broaden and streamline that discussion to make sure that all parties in the securities lending chain are clear as to the ultimate ESG remit. In the event that an agent lender and a beneficial owner haven’t done the same exercise for the parameters of their securities lending program not related to ESG, the ensuing discussion of ESG compliance will then be part of an all-encompassing review and the beneficial owner will ultimately have a better framework in place across the board, not just for ESG.”