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Reflections of the CEO

ESG Policy Framework & Strategy | ESG Steering Group

Earlier this week, Boris Johnson, the UK Prime Minster announced a series of initiatives that are part of what he described as a “green industrial revolution’. In amongst the eye-catching policies and ideas around electric cars and offshore windfarms, I noted towards the end of the announcements, a desire to make the City of London the global centre for green finance.

In looking at these proposals, sceptics might argue that the sudden prominence of this debate is no more than a reaction to the changing of the US Administration, where climate change issues will now come back into focus under a Biden-led White House. Whilst I wouldn’t want to comment further on that, there is clear evidence already that the UK is using the green agenda to differentiate itself in a post-Brexit world, as well as position itself as a world leader on these issues.

In previous posts, I have highlighted the extensive work that the European Union (EU) is doing in and around the green agenda, and we eagerly await the publication of the EU’s Renewed Sustainable Finance Strategy which is now expected in early 2021. It will be interesting to see if the UK chooses to diverge from the broad framework already being laid out by the EU. From the perspective of many of our members, for whom their businesses will transcend the new EU/UK regulatory border, such divergence whilst politically expedient essentially creates more cost and inefficiencies which ultimately the retail investor pays for. In the run up to the COP26 UN Climate Change Conference 2021 that the UK will host, we should expect to see increasing media attention on climate change, that in turn will drive a mixture of informed debate and polarised extremist views. It is therefore vitally important that we act as a voice for pragmatic and workable solutions that support these objectives, but also do not lose sight of the fundamental benefits that our industry brings to the wider capital markets.

We are already beginning to see how the electorate is looking to governments to actively pursue greener and perhaps softer policies, that take into account climate change and other important social issues. Financial services, and our markets in particular are not immune to these fundamental shifts in sentiments that are being driven in part by the desire of investors to reflect these ideas within their investment strategies. Whilst some headlines might suggest quite rightly that there is still much to do here, financial services has to an extent already embraced many of these concepts through the wide adoption of so called Environment Social and Governance (ESG) principles across the asset management sector.

The themes of responsible stewardship, including areas such as active shareholder engagement and proper social and environmental scrutiny, are now well-developed concepts across our markets, and are seen as the norm rather than new or novel.

Recognising the very real need to align securities lending with the broad aims of an ESG framework, ISLA established the ISLA Council for Sustainable Finance (ICSF) at the beginning of the year, to specifically address these important issues through the lens of the institutional investor. This forum did some invaluable groundwork in terms of raising global awareness of the specific issues impacting lending, and opening up consistent debates on the topic. The sustainable finance agenda is clearly gaining further momentum however, and it is becoming increasingly more apparent that we are moving rapidly from development and concept phases, to one of implementation. To support this transition and build on the foundations of both the Council’s work as well as our legacy ESG working group, ISLA will be consolidating and channelling its ongoing efforts through its steering group, group and subgroup structure, enabling it to benefit from the full resources of the Association and deliver on its ambitious objectives.

As we look to 2021, ISLA will be working towards a new ‘ESG Policy Framework’, that will be built around four key pillars; Regulation, Advocacy & Consultations, Best Practice, and Thought Leadership.

The first pillar will deal with specific legislation and policy outputs, together with responding to the developing taxonomy debate. The second will be a conduit for all relevant consultations, as well as helping to drive our advocacy efforts through various working groups to respond to these initiatives on a cross-industry basis. As an association, it is vital that we develop arguments and dialogue that support the entire securities lending value chain and the various ranks within our membership.

In many cases, the development and delivery of Best Practice will be the logical outcome of much of our ESG-related work, especially in areas such as taxonomies, collateral screening, short selling, and the often vexed issue of voting. Within this third pillar, we will therefore capture all of our best practice considerations and recommendations.

The final pillar will focus on the development and delivery of Thought Leadership and educational messaging. As part of our wider advocacy efforts, it is important that ISLA drives broad and open debates on the pivotal role of securities lending within the capital markets, and how that relates to our desire to align securities lending with ESG metrics.

Providing direction and input into these core streams or pillars, will be the primary role of our newly formed ESG Steering Group. In line with other key disciplines within the Association, such as Market Practice and Collateral, we are creating this new high-level group to help define our wider ESG strategy, and opine on the development of the aforementioned Policy Framework. Upon taking the lead to identify key initiatives and issues that are relevant to our wider community, they will work closely with other product or business-specific working groups to ensure we deliver consistent messaging and solutions.

In recognition of the importance of this initiative to both ISLA and its members, I am delighted to announce that the new group will be co-chaired by myself and Ciara Horigan, a senior member of the Regulatory, Industry and Government Affairs team at State Street, who leads in particular on their public policy positions in the area of sustainable finance. Ciara brings with her a wealth of knowledge and experience to the role, and will provide interesting perspectives to the topic. In particular, as her experience is much more broadly-based than the often narrow confines of securities lending, we will benefit from both her approach as well as understanding of the array of emerging global policies and initiatives.

The first meeting of the ESG Steering Group will take place on Wednesday 2 December.

Full details of this group and all of our other working groups, including details of how to join, can be found here.

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