ESG (Environmental, Social, and Governance) compliance is becoming an increasingly complex and challenging regulatory environment for entities to navigate into since the regulatory landscape needs to adapt to the effects of global warming, constitutional rights, social responsibility and environmental crimes.
In June 2020 and subsequently in July 2021, the Financial Action Task Force (FATF) issued guidance on the illegal wildlife trade and environmental crime which was then followed by additional publications on human trafficking, labor exploitation, illicit gold mining, and financial inclusion. These series of publications by the FATF show a link between the AFC (Anti-Financial Crime) and ESG frameworks which ultimately aim to improve the quality of financial flows globally.
Entities, especially the financial and investment management sectors have, over the recent years invested consequential amount of money and time to develop their AFC frameworks, and now their ESG framework is gaining momentum as well. Since both programmes require substantial investment, both in terms of time and money, having a centralised and comprehensive framework which will englobe both ESG and AFC seems to be the way forward.
On top of the above reasons, integrating ESG and AFC into a single centralised framework has multiple benefits. These include but are not limited to the following:
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.
So how can one move forward towards the integration? The following are a few good practices and recommendations that one may take into account to assess, design and manage ESG and AFC risks:
Entities primarily in the financial and investment services, may want to assess their ESG strategy by incorporating risk management and anti-financial crime techniques such as risk assessment of customer groups.
Customer groups operating under coal and consumable fuels, environmental and facilities services, oil and gas explorations, precious metals and minerals must be designated as a sensitive customer group in the overall ESG strategy. This designation may be considered during the carrying out of customer due diligence and arriving at an ESG score.
Within the ESG space, PwC Malta already established itself strongly and our Financial Crime Compliance (FCC) Team has gained extensive experience across a variety of sectors on AML/CFT legal and regulatory requirements. Both ESG and FCC teams are now combining forces to bring you the best solutions for your business operations to better understand the various new obligations, but most importantly, implementing practical controls to effectively meet these obligations and always ensure compliance thereto.
Contact us to set an appointment and find out how you can adopt a more effective, risk-based approach to ESG and AML/CFT.
