Wealth management is – alas – crowded with acronyms. KYC (Know Your Client) is one of the most ubiquitous and up there with it is ESG (Environmental, Social and Governance). The terms speak to advisors’ need to understand where and how their clients made their money and, increasingly, these issues mesh together.
That is certainly the opinion of Dermot Corrigan, chief executive of smartKYC. The firm offers technology to automate what is calls “relationship intelligence” collection and monitoring, for both risk and opportunity (the UK-headquartered business was founded in 2014). It works with organisations such as private banks and wealth managers as well as other large financial institutions for whom thorough due diligence on natural or legal persons is a must. The business enables clients to see “red flags” in case a client they have or wish to approach is the subject of a media/other report that might suggest there’s a problem. The system generates risk intelligence in real time and draws information from private/public sources across the world.
Reputations matter, and banks that onboard and look after clients with poor ESG behaviour run the risk of being harmed as a result, Corrigan told this news service. He said the firm has been thinking for some time about integrating ESG into the background checks firms should consider when onboarding clients.
“Wealth managers have to think about ESG risk exposure from a number of perspectives – investment compliance, supply chain integrity and increasingly, client onboarding”, he said, citing cases where
smartKYC’s technology is used to batch screen and monitor for ESG breaches.
Such issues made Corrigan think that there was a need to build more ESG thinking into the KYC checks that companies – not just financial institutions – need to make, he said. “It got me thinking that we needed to build something.”
The stakes are large. With COVID-19 also putting firms and governments under pressure to show how they treat employees, suppliers and clients fairly and well, pressure to consider ESG issues will increase. And it adds to an existing large compliance burden that financial institutions handle. According to LexisNexis in a recent survey it conducted, the total cost of financial crime compliance in North American, the Middle East, Africa, the Asia-Pacific region and Latin America amounts to $180.9 billion per annum.
Late in 2019 stockbroker firm Charles Stanley noted that the European Union had agreed that new ESG requirements should be included in part of its MiFID II suitability tests and that the UK was going along with this, regardless of Brexit. In practice, what this means is that a firm would have to collect ESG-related KYC information from all discretionary, advisory managed and advisory dealing clients.
Firms that break anti-money laundering laws may find that the reputational damage from, say, being found being associated with a business that is adversely impacting indigenous communities is far more serious than the cost of paying a fine to a regulator, he said.
Already, smartKYC’s bank clients are interested in the idea of putting ESG into the mix in their Know Your Client conversations, he continued.
More positively, however, firms that want to use compliance as a differentiator can make a virtue out of embedding ESG thinking, Corrigan said. And the move is inevitable anyway.
“This is all part of a sea-change – now more than ever businesses want and need to do the right thing,” Corrigan said. Such considerations matter particularly for younger adults, who are going to be the financial services and corporate leaders of the future.
smartKYC has developed a “rich taxonomy” to map out all the various aspects of what the E, S and G of that acronym mean. So in the case of S (Social) it covers areas such as labour conditions, health and safety, use of coerced labour such as slavery, gender inequality, treatment of certain groups or “castes”, and other issues. And smartKYC’s experience in using technology to sift through data unearths actionable intelligence for clients, Corrigan said. The same range of information can be plotted for the “G”, or governance, part, but not just in terms of governance at board level board but also trading behaviour on the ground. “Good governance isn’t just about board matters like diversity and NED representation, its about ensuring that local operations conduct their business in a responsible way and aren’t tainted by things like anti-competitive behaviour, community damage or intellectual property infringement. And we believe banks are less inclined to do business with people or firms that fall short of high ESG standards”.
“We have got a very fine-grained understanding of what ESG looks like,” he said.
Clients like the idea, he said. “When it is thrown into conversation clients realise that integrating ESG in this way is very useful.”
A challenge going forward is that currently businesses are “marking their own homework” when it comes to measuring how well they are doing with regard to ESG. “Better to look at the evidence” Corrigan argues.
A final, compelling reason for embedding ESG into how clients are taken on board is that this added information, handled intelligently, will save banks a great deal of time and cost in the longer term, Corrigan added.