Finance & Investment
Big Lessons for Sustainable Finance from Financial Economic Crime

During the last decade, financial institutions across the EU have navigated frequent regulatory changes relating to their responsibility in fighting financial economic crime (FEC), such as anti-money laundering and combating the financing of terrorism (AML/CFT) regulations. Financial institutions have had to reconstruct internal processes to ensure compliance as a result.

A substantial number of sustainable finance regulations for international European banks have come into effect (for example, the CSRD and the European Banking Authority’s LOM and ESG guidelines), and financial institutions will need to further mature their adherence. These regulations will come with long lists of requirements designed to create a clear picture of the customer’s sustainability profile — such as know-your-customer (KYC) efforts in detecting FEC (hereon: KYC/FEC). In this challenge lies opportunity: Sustainable finance teams can standardize and optimize their processes in an efficient manner by learning from their KYC/FEC counterparts.

So, where are the touchpoints?

At first glance, the two subjects seem wildly different: The risks related to financial crime present themselves mostly through clients’ transactions behavior and the bank’s payment and account services and products, whereas sustainability risks involving clients materialize mostly through credit risk on the lending side of financial institutions. However, the processes and challenges of engaging with clients conducting client due diligence and collecting data are similar.

KYC/FEC and sustainable finance are both sensitive topics that spark strong public reaction. Financial institutions should exercise an increased level of attention to ensure that, when they establish their sustainable finance infrastructure, they stay clear of the inefficient processes previously experienced in KYC/FEC.

Takeaways from KYC/FEC

Over the years, financial institutions have run into several common issues related to KYC/FEC — and sustainable finance teams can learn from these when implementing their frameworks and workflows:

• Unstructured data collection: Financial institutions, independent of their market share, still struggle to have one central system of data collection. This often causes employees to reach out to clients for information that could already have been stored in-house.

  This approach can mean that:

  • Clients are constantly receiving document/clarification requests.

  • The financial institution waits (unnecessarily) for client feedback, resulting in delays to the client journey.

• Digital communication portals: Financial institutions commonly deploy client-communication portals that have been bought via an external vendor, which is ineffective. Buying an outside solution can be restrictive as the system won’t be tailored to the specific needs of the clients of that financial institution. A tailor-made portal offers an experience that mirrors your company’s needs. Moreover, it can maintain a consistent presence across all points of customer engagement — a consistency demanded by consumers.

• Unclear workflows: In any journey there should be a fixed, detailed and clear workflow. The roles and responsibilities of each stakeholder within the workflow must be clearly defined but also outline its implications. It should be clear that not applying the actions of a role can lead to implications that harm the entire workflow.

The way forward

Financial institutions are taking steps to implement processes to address sustainable finance regulations. As a part of this, they also need to reach out to clients to obtain any ESG-related datapoints required to be compliant. This is where teams working in sustainable finance can exploit the lessons learned in KYC/FEC:

1. Firstly, sustainable finance professionals can take the lead and create open dialogue and collaborative channels with their financial crime counterparts — as their teams are most likely not aware of the needs and requirements of sustainable finance teams. If they don’t do this and both financial crime and sustainable finance teams then request client documentation and ask complicated questions independently, the client experience can become too much of a burden. To maintain high levels of client satisfaction, financial institutions should be wary of overcomplicating processes.

2. Secondly, sustainable finance teams should be aware that their requests will likely be quite specific, to the point where clients will request continued support. Clients can use guidance and assistance with technical data requests on, for example, GHG emissions, biodiversity or water usage. The goal here should be to simplify the process to make it as efficient as possible. As mentioned above, financial institutions must invest in a simple, efficient and user-friendly client-communication portal. When reaching out during onboarding, each requirement should have a clear and specific description of what is needed — preferably, with examples attached. A concise client-communication portal can also help employees of a financial institution to ask questions correctly.

3. Lastly, financial institutions should learn from the experience in KYC/FEC when dealing with a changing regulatory environment. There should always be openness and transparency in terms of sharing challenges and shortcomings proactively in the communication channels with regulators (ex: AFM, DNB and ECB). Within KYC/FEC, banks frequently interact with the regulator and are often involved in (costly) regulatory-remediation programs. To navigate the sustainable finance landscape more effectively, banks can use these interactions and the experiences as useful resources.

Sharing information for greater efficiency

Despite the sometimes-onerous requirements these regulations present for large European banks, there are clear lessons sustainable finance professionals can take from the extensive work of their counterparts in financial economic crime. There is a wealth of experience and expertise for sustainable finance professionals to tap into — and the main message is that teams should be looking to proactively share information and collaborate whenever and wherever possible. Great opportunities exist for these teams to share knowledge and improve processes, driving efficiencies while ensuring client satisfaction and full adherence to any new rules.