Global Bank Review: Boosting virtue, banning vice – will ESG and financial crime agendas converge?

As ESG evolves from its roots in fostering virtuous investment towards prescriptive regulation, we ask if the tools to tackle financial crime will converge with the wider social agenda.

This article is part of our 2021 Global Bank Review – ESG: Creating a purposeful future, an annual publication by our Global Banks Sector Group which brings together our people who live and breathe banks.

In theory they stand a world apart. Anti-Money Laundering (AML) and financial crime teams help their banks guard against a subset of ESG risks – particularly that of the bank being used to support criminal activity linked with terrorist organisations, corrupt officials, drug traffickers, illicit arms dealers and other forms of crime.

In comparison, the wider field of ESG conjures up images of new investment horizons and mainstream corporate strategy, while AML and financial crime are seen as narrower domains of compliance experts and procedures. Will that always be the case? Will the bank of the future see ESG and financial crime in these distinct terms, or are there opportunities to reappraise the way we view these two domains?

Gazing ahead allows us to explore and plan for different scenarios and the forces that might shape the increasing bonds between financial crime compliance and the wider ESG agenda in the bank of the future. This piece explores three possible scenarios.

A criminalised ESG future? 

One possibility could be a future where legislators proactively drive convergence of ESG and financial crime standards through growing regulation of who corporates should – and should not – do business with. Sanctions laws already provide a framework for prohibiting dealings with rogue political regimes and terrorist groups, and we see increased focus in sanctions and trade regulation on human rights issues, especially forced labour and modern slavery. In short, legislators are already leveraging sanctions and AML requirements to address ESG issues.

Within this framework, legislators have tools to regulate and potentially criminalise dealing with persons or entities that flout the social or environmental factors within ESG. Indeed, with climate issues increasingly viewed through a human rights lens, it is hardly a large step to see sanctions regimes deployed to ban dealings with the most egregious environmental offenders. Those who question whether an increasingly criminalised world will materialise need only look at recent moves to recognise ecocide, classed as unlawful or wanton acts threatening severe destruction to the environment, as an international crime.

A world where such concerns are increasingly prosecuted through criminal sanctions and trade regulation would markedly shift the ESG conversation even further from its roots in ethical investing, towards new realms of considering how criminal law could tackle socially unwelcome conduct by corporates. It would also double down on existing expectations on financial institutions to help police criminal corporate conduct.

A regulated patchwork future

Another possibility could be a future where AML, sanctions and trade regulators move even further into the ESG space in a manner that layers yet more regulation onto companies, banks and financial institutions, without any of the benefits of convergence.

In this world, the multiplicity of regulators across different sectors and jurisdictions would create requirements that sometimes overlap and sometimes silo. The strong enforcement reach of AML regulators – who can often levy significant fines – may concentrate disproportionate attention on any ESG areas that are a focus of those agencies, rather than reflecting a rational assessment of where attention should be directed in policy terms. This scenario also risks ESG issues being seen as the preserve of the compliance or second line functions, remaining siloed, without meaningful buy-in from the first line business.

Moreover, there is the potential for direct conflict, rather than mere divergence, between national sanctions and trade regulations regimes. Insofar as sanctions and trade restrictions motivated by ESG concerns may be perceived as “political” or as motivated by economic rather than environmental and social concerns, such measures may provoke “blocking statute” and counter-sanctions responses, further complicating the compliance picture for multinational companies.

This scenario is a reminder that companies need to grapple with how ESG considerations should be prioritised, and guard against the natural tendency for priorities to be merely dictated by the most aggressive regulatory watchdogs.

Triumphant data

A third scenario involves the triumph of technology, data and systems to leverage AML and financial crime processes in the assessment of ESG risks. Banks and AML-regulated institutions have invested heavily in customer due diligence and know-your-client processes and, more recently, in tackling investor and supplier due diligence. Many banks are also incorporating a reputational risk overlay through decision-making across various parts of their business.

This scenario sees banks capitalise on these strengths and trends, finding synergies in streamlining systems, data and practices developed for AML processes to aid collection and analysis of data for wider ESG purposes.

Of course, it will require expertise to be brought together from across the gamut of ESG areas – understanding climate considerations and human rights impacts involves different skills to the investigation of suspicious activity and the development of financial crime policies.

This technological utopia raises a challenge in how financial institutions might respond to current developments in ESG, AML and financial crime – not only to explore whether there are more synergies in systems that can be leveraged now, but to understand the limits of what data and systems could be expected to support, and the role that human assessment will need to continue to play.

So where does that leave our planning for ESG and financial crime? Exploring these possible future scenarios highlights one common theme: the opportunity – even the imperative – for ESG considerations to be even further mainstreamed and fully integrated into how banks tackle a range of issues, including financial crime. In doing so, banks will best future-proof their businesses for whatever is on the ESG and financial crime horizons.