Financial Services
The role of Environmental, Social, and Governance (ESG) factors in financial crime compliance
The integration of Environmental, Social, and Governance (ESG) factors into financial services is transforming compliance frameworks, particularly in financial crime prevention.
ESG in financial services refers to criteria evaluating a company’s environmental impact, social responsibility, and governance practices, forming key benchmarks for sustainable operations.
With regulatory bodies, investors, and consumers prioritising ESG, financial institutions are expanding their focus beyond Know Your Customer (KYC) and Anti-Money Laundering (AML) to assess clients' and partners' ethical and sustainable practices more comprehensively.
This shift in risk management requires institutions to go beyond conventional compliance frameworks and adopt a more holistic approach.
Integrating ESG risk assessment into compliance frameworks
The intersection of ESG and financial crime highlights how unethical business practices often align with illicit financial activities. Integrating ESG risk assessment into existing compliance frameworks requires a multi-dimensional approach to enhance risk detection, ensure regulatory compliance, and promote sustainable business practices.
Enhanced due diligence
Traditional KYC/AML processes should be enhanced with ESG due diligence to ensure a more holistic risk assessment. This entails evaluating the environmental, social, and governance practices of clients and partners, including their supply chains, labour conditions, regulatory compliance, and environmental impact. By integrating ESG considerations, organisations can mitigate reputational and financial risks while fostering sustainable and responsible business relationships.
Data integration
Financial institutions must incorporate ESG data from public databases, regulatory disclosures, and third-party assessments to strengthen compliance frameworks. Incorporating this data into existing compliance frameworks enables a comprehensive risk evaluation of clients and partners, enhancing due diligence and aligning with evolving regulatory and sustainability standards.
Risk scoring and monitoring
ESG risk scores should be incorporated into broader risk assessments, enabling financial institutions to proactively identify high-risk clients and transactions. Continuous monitoring of ESG performance is essential to track shifts in risk profiles, detect emerging threats, and address potential red flags promptly.
Transaction monitoring
Advanced analytics and machine learning (ML) can enhance the detection of suspicious transactions potentially linked to ESG-related risks. For instance, anomalous financial flows to entities with poor environmental records or documented human rights violations should be flagged for further investigation, enabling proactive risk mitigation and regulatory compliance.
Sanctions screening
Sanctions frameworks are expanding to target individuals and entities linked to environmental crimes and human rights violations. Integrating ESG data into sanctions screening processes enhances the effectiveness of these measures, enabling financial institutions to identify and mitigate risks more proactively.
Reporting and disclosure
Financial institutions should strengthen their reporting and disclosure practices to enhance transparency around ESG risks and compliance efforts. This includes outlining how ESG factors are integrated into risk assessments and detailing the management of ESG-related red flags.
Training and awareness
Compliance professionals must be equipped with specialised training on the intersection of ESG and financial crime. This includes understanding the different types of ESG-related offences, recognising associated red flags, and leveraging effective tools and techniques to mitigate these risks.
Adopting Regulatory Technology (RegTech)
RegTech solutions specialising in ESG data analysis, risk scoring, and real-time monitoring are essential for scalable and efficient ESG integration in financial crime compliance frameworks.
Technology’s role in ESG compliance
Technology plays a critical role in embedding ESG considerations into financial crime compliance frameworks. Key advancements driving this transformation include:
Data Analytics: Advanced analytics solutions leverage big data and ML algorithms to assess ESG risks by identifying patterns, anomalies, and correlations within customer behaviour and transactional data, enabling proactive risk mitigation and regulatory compliance.
AI-Powered Screening: AI-powered adverse media screening employs natural language processing (NLP) and ML to detect hidden associations between entities, financial crimes, and ESG violations. These AI-driven algorithms analyse extensive data in real time, improving risk identification and due diligence processes.
Blockchain for Transparency: Blockchain technology enhances supply chain transparency by providing an immutable, decentralised ledger that ensures traceability and accountability. This reduces the risk of fraud, unethical practices, and governance failures by enabling real-time transaction verification and compliance with ESG standards.
RegTech: RegTech has evolved significantly in managing ESG risk complexities within compliance frameworks. By leveraging advanced technologies such as AI, ML, and big data analytics, RegTech automates real-time ESG risk assessment, compliance monitoring, and reporting. These tools not only streamline compliance workflows but also enhance data traceability and auditability, ensuring greater transparency and accountability in ESG governance.
Transaction Monitoring: ML is integral to identifying anomalous transactions associated with ESG risks through advanced anomaly detection algorithms. These algorithms analyse historical transaction data to establish behavioural benchmarks, flagging deviations that may indicate illicit activities such as money laundering or financial flows linked to environmental crimes and human rights violations.
Additionally, predictive analytics enhances this process by leveraging historical trends and external data inputs to identify emerging risks, enabling proactive risk mitigation and regulatory compliance.
By leveraging these advanced technologies, organisations can enhance regulatory compliance, strengthen risk management frameworks, and proactively demonstrate their commitment to ethical and sustainable business practices.
How can Infosys BPM help?
Integrating ESG risk assessment into compliance programmes is no longer optional—it’s a strategic necessity. Infosys BPM empowers financial institutions with cutting-edge solutions that seamlessly embed ESG considerations into Financial Crime Compliance (FCC) frameworks.
By integrating ESG principles with financial crime compliance, businesses can enhance transparency, mitigate risks, and build a more resilient financial ecosystem—reinforcing their position as leaders in ethical and sustainable finance.
