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ESG Expands into Collateral Management

Since environmental, social and governance (ESG) was coined in the study Who Cares Wins in 2005, it has grown from a niche consideration to a mainstream trend. It is now a norm for institutional investors to integrate ESG considerations into investment decision-making, seeking positive returns while keeping in mind the potential long-term risks to asset performance.

I have been talking publicly about ESG and collateral for just over 4 years now and I was honoured to be invited by State Street to share my views. In the attached document Sam Edwards (APAC Head of Collateral, State Street) and I explore the drivers behind investor thinking and our thinking on the future development in this critical area.

It is clear that investors are taking into account a broad range of factors as part of their decisions regarding impact investing - including the utility of assets as collateral to give and when receiving collateral.

Companies that do not have real sustainable agendas will inevitably suffer. In a recent article from Cliff Asness, Founder and CIO of AQR who argues that short selling is an important tool to target companies that have no/poor/fake ESG objectives, driving up their cost of capital over time. I couldn't agree more.

Additionally, yesterday Keith Tait of Hansuke posted on LinkedIn regarding "ESG Funds’ Lack Truth in Labeling" revealing that 94 funds had ‘ESG’ in their names yet 60 of those earned a ‘D’ or an ‘F’ on one or more ESG criteria and questionning whether it is time for a rethink. Indeed.

Securities finance may be a somewhat hidden part of the financial market plumbing, but its importance is clear and will grow as time passes.

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