Industry Updates

Invesco to start securities lending on ESG ETFs

The asset manager said the practice will not compromise its ETF's ESG characteristics

Theo Andrew

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Invesco is set to include its ESG ETFs within its securities lending programme in a bid to boost the “consistency and price competitiveness of its product range”.

Following a review of its collateral rules, Invesco said ETFs with ESG characteristics will be included within the programme from 13 March noting that inclusion would not compromise the sustainable characteristics of the ETFs.

Securities lending with ESG ETFs has long been a no-go area for issuers which have been worried about reputational damage and collateral problems despite the potential for enhanced returns

However, the rise of ESG ETF launches and sustainable index switches has seen products slowly being included in issuers’ lending plans.

Invesco said for fixed income ESG ETFs between 0-30% of their assets may be subject to securities lending and 0-15% for equity ESG ETFs.

Matthew Tagliani, EMEA ETF head of product and sales strategy at Invesco, said it was important that lending did not diminish the ETF's engagement as a shareholder and reflected its current ESG criteria.

"In response to this, a separate lending policy was designed for ESG funds and this program has been gradually rolled out across our UCITS ETF range, as well as many funds in our EMEA active business," he said. 

Tagliani added lent securities are recalled prior to votes to ensure engagement while the schedule of acceptable collateral is restricted to government bonds from a select list of countries and supernational entities.

"This approach has received positive feedback from clients as an appropriate way to deliver the benefits of securities lending without weakening the fund’s ESG criteria," he said. 

Elsewhere, the US giant’s government bond ETFs will see the maximum securities lending levels increase from 30% to 50%, as will the €29.3m Invesco Euro Cash 3 Months UCITS ETF (PPEU).

“The directors have determined that this increase in securities lending is appropriate, proportionate, and does not impact on the investment manager's ability to manage and monitor the risks arising from the increase in securities lending,” the German asset manager said.

Last June, the European Securities and Markets Authority (ESMA) said it had several concerns around the ETF securities lending fee practices including fee and revenue splits between the asset managers and securities lending agents, suggesting that asset managers return only between 50-65% of the gross revenues to the end investor.

However, Invesco said it does not take a share of the revenue made by lending, with 90% received by the fund and 10% by the lending agent. 

DWS has also changed course on including ESG ETFs in its securities lending programme in recent years.

In August 2021, the German asset manager switched to an ESG index on nine Europe sector ETFs, noting the collateral it receives from securities lending would comply with the firm’s ESG standards, among the first ESG ETFs in Europe to do so.

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