StarCompliance: Fintech solutions for effective ESG compliance

Environmental, social and governance (ESG) has developed into a significant contributing factor for all aspects of business operations within financial services. But despite the intention to deliver good, the pursuit of ESG goals can ultimately turn sour if not properly managed and mitigated.

In anything but just another article on ESG efficiency, here Stuart Breslow gives Fintech Times with a fascinating insight into the negative externalities of achieving ESG initiatives, and more specifically into ESG’s relationship to personal securities trading.

Breslow is an independent director of the financial compliance software solutions provider StarCompliance. He is a distinguished senior executive with over 30 years of experience in world-class financial services, consulting and technology organizations.

Here, Breslow describes the reputational risks involved in personal securities trading and how their impact can be mitigated through the use of automation:

with the investors’ current focus on ESG, companies must be aware of regulatory and reputational risks that they may not have previously considered. This is especially the case with ‘G’ — steering — where potential landmines may not be obvious. One landmine, in particular, is personal securities trading by company executives and employees.

Financial services providers have long adopted policies and processes to understand and monitor the personal securities trading activity of managers and employees, not only because it was required by law and regulation, but also to protect their most precious asset: their reputation.

It is not enough to maintain the status quo

Non-financial services companies have generally understood that their executives’ and employees’ personal securities obligations are limited to adopting policies with guidelines for such trading, directed brokerage for employee stock plans, and with respect to a very limited number of company insiders, often manual trade pre-clearance and reporting processes.

News Alert: Policies without robust processes to enforce them just don’t cut it these days.

Companies must consider the legal and reputational risks that managers and employees’ securities trading may expose them to. Most companies think of trading in the context of the securities they issue themselves, and they warn managers and employees not to trade those securities when in possession of material non-public information and, with some groups, only during permitted window periods.

The perceived enforcement mechanism for this policy ambition is that managers and employees will be aware of these guidelines and trade the company’s securities only through accounts the company has designated for the deposit of securities awarded compensation.

But what about the securities of competitors that may be affected by developments in the company? For example, what about securities the manager or employee may have bought (or sold short!) in the open market in other accounts? What about the securities of potential merger or acquisition targets? In these and other situations, the company, its executives and its employees may face legal and reputational harm.

Risk reduction via compliance automation

What can be done? In these times, companies must, at a minimum, assess the risks that managers and employees’ personal account trading exposes them to and ensure that their policies provide adequate risk mitigation. Beyond these table rates, there are relatively inexpensive compliance management processes that companies can adopt to protect themselves and their managers and employees.

First, companies should define the group subject to pre-trade declaration and post-trade monitoring. This group should definitely include all senior executives and employees who are understood to have access to non-public information. If necessary, this group can be expanded to include entire areas (e.g., finance, strategy, investor relations) or, depending on the size of the organization, all employees (e.g., front-line employees who may become aware of production problems or researchers with knowledge of the trial results ).

So what?

There are fintech solutions on the market that tackle the challenge from start to finish companies underutilize them. First, managers and employees should be required to disclose all their securities brokerage relationships in an automated solution.

There are compliance automation providers who can then connect with the disclosed brokers so that final trade reports are sent electronically to the company. These trades can be fed into highly developed monitoring routines that can, among other things, assess past trading by an individual, look for trading patterns of more than one manager or employee, and layers in trading activity in the securities in the market or news about the securities. Compliance or legal analysts at the company, when reviewing the activity, will follow up as needed or close the review in an automated workflow.

Does adopting a program like this bring complete comfort to a company or its investors? No, because as we all know, criminals intent on criminal activity will find ways to evade control. From an ESG perspective, however, companies will be well served. It will be clear to law enforcement and investors that they had assessed and established robust controls (a significant positive governance) and that the criminal behavior had only occurred because the manager or employee had violated company policies and processes designed to enforce these policies.