Four Questions: Understanding ESG’s Convergence with Fighting Financial Crime

ESG

Environmental, social and governance initiatives within financial institutions are a current hot topic for discussion in corporate board rooms and the financial press, with critics writing them off as at best peripheral to the function of corporations and at worst platitudinous distractions from the bottom line. In his recent white paper, Environment, Social, and Governance (ESG) and Anti-Financial Crime (AFC) Convergence, ACAMS’ Dr. William Scott Grob makes the case that ESG programs actually enhance financial institutions’ anti-money laundering and anti-financial crime efforts.

William Scott Grob

ACAMS Today: There is a lot of buzz right now about ESG and some debate about its importance. Your white paper concludes that best practices in ESG enhance a financial institution's (FI) anti-financial crime effort. How does ESG complement and enhance AFC?

William Scott Grob: ESG and AFC risk programs both drive greater social responsibility across a FI’s business strategy, operations, customer base, supply chains and product channels.

For instance, when an ESG team flags projects with unsustainable characteristics in a high-risk sector or jurisdiction, an AFC program may benefit from enhanced due diligence to uncover questionable financial flows or unsavory or corrupt connections with politically exposed parties.

AT: Building on the above question, can you talk about the intersection between an FIs AFC risk analysis and doing an ESG risk analysis? 

WSG: If you examine deforestation, a principal cause of climate change, you discover that illegal logging is a contributor. Take, for example, the illegal harvesting, transportation, and sales of rosewood (Genus Dalbergia) for furniture.

An ESG analysis will typically begin examining the ecosystem and root causes of deforestation. Next, financial institutions with environmental and sustainability policies will evaluate companies through the timber supply chain and place ESG-related restrictions on the industry or the companies targeted.

In contrast, an AFC risk analysis will search for suspicious activity through due diligence or transaction review. An analyst will map the flow of money intertwined in the supply chain, identify corrupt parties and intermediaries and report their findings.

As a result, the two kinds of analyses are complimentary in applying risk frameworks, identifying sources of risk, applying decision-making processes and steering organizations away from those risks. The white paper underscores these connective processes.

AT: When one talks about ESG, there can be a lot of non-specific platitudes about creating a culture for ESG compliance. Can you identify a few specific policies, controls and/or procedures that manifest good ESG compliance culture within a financial institution?

WSG: Creating an environment for ESG compliance is much like AML compliance. Risk managers require principles and processes that reinforce governance frameworks for assessing the impact, assigning senior management responsibilities, adopting policies and procedures, creating an internal framework, quantifying the risks and time horizon, monitoring and managing the process, and reporting to management the process. Moreover, AFC professionals should be well acquainted with these risk management processes.

AT: Can you help readers understand the positive outcomes produced by having an ESG program in place at a financial institution, whether it be about human or wildlife trafficking, environmental crime or other issues? 

WSG: First and foremost, the political climate has changed to accepting climate-change initiatives and recognizing that the financial sector can provide related incentives and disincentives. Second, financial institutions are judged by investors, external stakeholders and regulators. Third, boards are being pressed to improve a financial institution's ESG score. Finally, compliance professionals should recognize that their positive contributions to fighting financial crime can be extended to ESG efforts.

Environmental crime, illegal wildlife, modern slavery and human trafficking generate billions of dollars. These crimes rank at the topmost profitable crimes. We must recognize that AFC and ESG issues negatively impact real communities, our environment and society—notably those most vulnerable. Accordingly, civil society is demanding more from our financial institutions. 

To submit topic ideas or comments, email editor@acams.org. 

Interviewed by: Kieran Beer, CAMS, director of editorial content, ACAMS, @KieranBeer

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