Global warming, environmental rights, social responsibility, associated crimes and other ESG (Environmental, Social, and Governance)-related factors have become an integral part of today’s regulatory landscape. Understanding how these may affect any anti-financial crime (AFC) strategy has become imperative. Specifically, in June 2020 and July 2021 respectively, the Financial Action Task Force (FATF) issued guidance on the illegal wildlife trade and environmental crime , followed by subsequent publications on human trafficking, labour exploitation, illicit gold mining, and financial inclusion. This series of publications by the FATF highlight the link between the AFC and ESG frameworks.
Integrating ESG and AFC
Entities - especially those involved in the financial and investment management sectors - have been investing substantially, both in terms of money and time, to develop their AFC frameworks, and now their ESG-related strategies are also gaining momentum. Since both programmes require considerable investment, developing a centralised and comprehensive framework encompassing both ESG and AFC is many times an effective strategy.
The benefits to the integration of ESG and AFC into a single, centralised framework, include:
- Efficiency
- Balancing between opportunities and risk exposure
- Being compliant
Efficiency
Integrating ESG and AFC into one centralised framework reduces the overlap between the monitoring and reporting of activities by creating synergies in their existing detection, mitigation and reporting techniques.
Balancing between opportunities and risk exposure
There are notable advantages to organisations striking a good balance between exploring business opportunities and mitigating the associated risks. When implementing a single framework, it becomes easier to detect financial crime risks and implement effective mitigation methods.
Being compliant
With increased regulatory oversight, reporting obligations and with regulators continuously emphasising the importance of best practices, integrating both programmes in a single framework will help improve accountability, transparency and good governance.
Good practices and recommendations
So what are the first steps towards integration? The following are a few good practices and recommendations that one may consider when assessing, designing and managing ESG and AFC risks:
- Assessing one’s ESG framework to defuse AFC threats
- Designing of policies and risk appetite statement
- Embedding ESG risks into the AFC enterprise-wide assessment
Assessing one’s ESG framework to defuse AFC threats
Entities – primarily those involved in in financial and investment services - may wish to assess their ESG strategy by incorporating risk management and AFC techniques, such as risk assessment of customers’ group structures.
Customer groups operating in industries involving coal and consumable fuels, environmental and facilities services, oil and gas explorations, precious metals and minerals must be designated as sensitive in the organisation’s overall ESG strategy. This designation may be considered when carrying out customer due diligence and subsequently arriving at an appropriate ESG score.
Designing of policies and risk appetite statement
One can also tailor one’s internal policies and procedures to include prohibitions (e.g., commercial activities that involve human trafficking) and restrictions (e.g., investment on a business activity that may lead to environmental crimes) that align with the organisation’s ESG and AFC strategy.
A common practice is to emphasise zero risk or limited risk appetite for conflict areas due to increased human rights risks, sanctioned jurisdictions and/or businesses or individuals known to be involved in various forms of modern slavery, such as forced labour or human trafficking.
Embedding ESG risks into the AFC enterprise-wide assessment
Entities adopting the risk-based approach have systems and controls in place to mitigate the Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) risks. Similarly, ESG risks can be embedded into the AFC enterprise-wide assessment, with an environmental and social assessment resulting in areas being classified into different categories, similar to the high, medium and low-risk approach utilised in AFC.
ESG and AFC share numerous risk factors, resulting in the possibility of an entity streamlining its ESG and AFC risk identifications, reporting and mitigation concurrently. Leveraging the ESG concept with existing AFC activities can ultimately lead to the enhancement of sustainable activities, and subsequent improvement of business practices.
How can PwC Malta support you?
PwC Malta’s ESG and Financial Crime Compliance (FCC) teams have both gained extensive experience across a variety of sectors with respect to AML/CFT legal and regulatory requirements, and their links with ESG. Both teams may assist you in enhancing your business operations and better understand the various obligations emanating from the FATF’s above-mentioned guidance notes, and most importantly, implementing practical controls to effectively meet these obligations and always ensure compliance thereto.
Contact us to find out how you can adopt a more effective, risk-based approach to ESG and AML/CFT.
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