厙惇勛圖

Home   News   Features   Interviews   Magazine Archive   Symposium   Industry Awards  
Subscribe
厙惇勛圖
Leading the Way

Global 厙惇勛圖 Finance News and Commentary
≔ Menu
厙惇勛圖
Leading the Way

Global 厙惇勛圖 Finance News and Commentary
News by section
Subscribe
⨂ Close
  1. Home
  2. ESG news
  3. The securities lending market is yet to win over ESG ETFs
ESG news

The securities lending market is yet to win over ESG ETFs


17 December 2020 Germany
Reporter: Drew Nicol

Generic business image for news article
Image: mmg1design/adobe.stock.com
厙惇勛圖 lending programmes do not generate enough income to be worth doing for exchange-traded funds (ETFs) that track environmental, social and governance (ESG) indexes, according to German asset manager DWS.

The need for restrictive collateral parameters and regular recalls creates a number of other challenges and alters the economics of the securities lending function to the extent that it effectively erodes much of the potential revenue from lending, says DWS passive product specialist structurer Zeb Saeed.

DWS, which is majority-owned by Deutsche Bank, recently pulled the plug on the lending programme for one of its ETFs as part of its switch from tracking a traditional FTSE index to an ESG-friendly one.

The UCITS ETF, with $37 million in assets under management, has swapped the FTSE All-Share index for the MSCI UK IMI Low Carbon SRI Leaders Select index which tracks small and mid-cap UK entities with high ESG scores.

DWS tells SFT that 11 of its 250 UCITS ETFs are now tracking ESG indexes but the latest one was the first to be switched over and therefore the only fund so far to close a lending programme.

The asset manager also has 33 Xtrackers listed, of which eight are ESG focused.

The other ESG ETFs were either purpose built or did not lend assets before transitioning to an ESG index.

A spokesperson for DWS adds that the asset manager is very focused on expanding our ESG ETF range.

Beyond the operational challenges of juggling ESG compliance and a lending programme, the fragmented nature of the sustainable financing sector makes it difficult to compare funds performance, relative to standardised and more crowded indexes.

As a result, the less competitive environment means funds do not have to seek out additional incremental returns offered by securities lending programmes and other financing strategies.

Saeed notes that lending agents are capable of constructing bespoke ESG-friendly programmes with collateral rules and automatic recall facilities but concedes that this would make the assets unpopular with borrowers.

It all adds up to those wanting to borrow stocks being incentivised to borrow from funds tracking non-ESG benchmarks. These reasons, amongst others, lead providers to therefore not engage in securities lending on ESG ETFs, explains Saeed.

Meanwhile, DWS also suggests there is an ethical dimension to consider as investors seeking an ESG investment may have an issue with securities lending as it facilitates short selling.

DWS stresses it doesn't take a view on the ethics of the matter and only seeks to respond to specific investor demand.
← Previous ESG article

ISLA puts ESG centre stage for 2021
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to 厙惇勛圖 Finance Times
Advertisement
Subscribe today
Knowledge base

Explore our extensive directory to find all the essential contacts you need

Visit our directory →
Glossary terms in this article
→ Collateral
→ Recall

Discover definitions, explanations and related news articles in our glossary

Visit our glossary →