ESG Screening and Compliance: A Guide for Financial Institutions in 2026
ESG screening and compliance is at the core of financial risk management. Climate exposure and human rights concerns can trouble financial institutions as well as corruption, sanctions, governance failures. ESG factors are now closely linked withed anti-money laundering (AML), sanctions compliance and reputational risk.
In this blog post, we’ll be detailing ESG, ESG screening, why this type of screening is crucial for companies and what the recent ESG screening trends are.
What is ESG?
ESG is also known as (E)nvironmental, (S)ocial, and (G)overnance. It is a framework that helps understand how well companies manage non-financial risks within their company. Each section of ESG shows different risk factors that can affect companies negatively.
Environmental risk is about how a company’s actions affect the environment, nature, and how environmental factors as well affect the company’s actions. Most well-known areas are greenhouse gas emissions, pollution, resource depletion, biodiversity loss, as well as climate-related events affecting the company like floods, droughts, extreme weather, earthquakes.
Social risk is related to how companies treat people and communities in their operations and within their value chains. Labour rights, working conditions, health and safety, community impact can be given as examples. Acts like forced labour, child labour, discrimination, unsafe working conditions can have legal, regulatory, reputational consequences for companies.
Governance risk refers to how a company is controlled and run. Corporate governance structures, board oversight, executive accountability, internal controls, corruption, bribery, lack of transparency can be counted as examples. Weak governance can signal to broader compliance failures like financial misconduct and regulatory breaches. Companies can benefit from remembering governance risk is often related to politically exposed persons and entities in high-risk environments where poor oversight can be more serious.
What Is ESG Screening?
ESG screening is the act of identifying and assessing environmental, social and governance (ESG) risks that are linked to people, companies, investments, countries. This screening helps companies figure out whether the person/company/country they’re looking into is involved with issues like environmental harm, human rights violations, corruption, poor labour practies, or weak corporate governance.
ESG screening helps prevent crimes and unwanted relationships with parties that have poor reputation. ESG screening helps focus on risk identification and companies then can decide whether the counterparty is worth the risk or not. 71% of global dealmakers reported that ESG has become significantly more important in transactions within the last 12 to 18 months.
The relevance of this type of screening is growing each year since ESG risks are related to compliance, sanctions, AML, reputational risk. Regulatory bodies pay attention to these types of issues and compliant companies can portect themselves by implementing ESG screening software into their workflows.
Who Needs ESG Screening and Why?
There are several sectors that can benefit from usign ESG screening. Banks and financial institutions use ESG screening to identify environmental, social, governance red flags in customer relationships, correspondent banking, trade finance, and lending portfolios. Regulatory breaches, sanctions exposure, reputational harm can be stopped thanks to this screening.
Fintechs and payment providers also face these risks, and with high transaction volumes, cross-border activity, limited direct customer interaction, these risks are multiplied. With ESG screening, these firms can identify high-risk customers and partners linked to corruption, labour abuses, environmental misconduct.
Corporates with complex supply chains can also rely on ESG screening. This screening can be used to assess suppliers, contracters, partners. ESG screening can expose forced labour, unsafe working conditions, environmental damage, weak governance. ESG screening exposing these problems can reduce legal liability, regulatory penalties, loss of market access.
Investors and asset managers can also benefit from ESG screening since identifying ESG risks early helps investors avoid exposure to companies that may later face sanctions or exclusion from markets.
ESG screening can help mitigate ESG risks, develop Article 8 or 9 funds, support business models that address ESG issues, develop regulatory aligned portfolios, and improve or maximise a portfolio’s ESG rating.
What Types of Risks Can ESG Screening Help Identify?
ESG screening can help identify risks that are non-financial initially, but can transform into financial, legal and reputational liabilities if not caught sooner. Showing these red flags early can enable teams to take preventative action before things leads to enforcement or sanctions.
Human rights violations are especially seen in high-risk jurisdictions and complex supply chains, so ESG screening should be applied accordingly. These violations include forced labour, child labour, unsafe working conditions, discrimination and more. These actions can lead to regulatory penalties and reputational damage.
Environmental crimes are another important category. ESG screening can uncover cases of illegal deforestation, wildlife trafficking, pollution, unlicensed mining, breaches of environmental regulations. These acts are offten associated with organised crime, fraud, and more.
Corruption and bribery risks can be weak governance, political exposure, allegations of bribery and misuse of public funds. ESG screening can help detect these warning signs early.
Supply chain abuse is also known by regulators and investors. ESG screening can help companies assess suppliers and partners for labour exploitation and unethical practices. Similarly, governance failures like lack of board oversight, lack of transparency, conflicts of interest, weak internal controls can be signs of broader misconduct.
Data Sources Used in ESG Screening
ESG screening uses lots of data sources to correctly identify non-financial risks and avoid mistakes. Public disclosures and filings are often used in ESG screening. These can include annual reports, sustainability reports, regulatory filings, corporate governance disclosures. Even though these are useful, these only show what the companies want to disclose.
Adverse media and NGO reports are also used for identifying ESG issues. News articles, journalism, court records, reports from non-governmental organisations can expose environmental harm, labour abuses, corruption, governance failures before they are shown in official filings.
Government and regulatory data is another data source, which includes sanctions lists, enforcement actions, environmental penalties, labour violations, court judgments, procurement blacklists. These documents show misconduct.
ESG screening also uses alternative and unstructured data like supply-chain data, satellite imagery, social media signs, local language sources. These help uncover risk is complex environments.
ESG screening is directly showing the limitations of self-reported ESG data. Corporate disclosures can’t always be trusted since they can be selected to look better, inconsistent, incomplete, and these rarely show third-party behaviour. Self-reported information, then, should be combines with independent and external data sources, which is how ESG screening works.
Key ESG Screening Trends for 2026
Since regulatory expectations are starting to involve ESG screening more, it will surely shift to a core compliance and risk function in 2026.
An important trend that reflects the emergence of ESG screening is the integration of ESG into core compliance frameworks. ESG screening is starting to become more embedded into AML, KYC, sanctions and thirtd-party risk management workflows. Since ESG risks often overlap with financial crime and reputational risks, the appropriate attention should be given.
Also, social and human rights screening is becoming more popular. Important issues like forced labour, modern slavery, worker safety and community impacts are taken more seriously thanks to regulatory pressure and public scrutiny. Screenings are also moving beyond direct counterparties to suppliers, subcontractors, indirect relationships.
Biodiversity and nature related risks are emerging as important areas as well. Exposure to deforestation, ecosystem degradation, water stress and illegal resource extraction are being screened by companies. These risks can especially affect agriculture, mining and infrastructure.
What Is Greenwashing and How Can ESG Screening Detect It?
Greenwashing is the practice of misrepresenting environmental or sustainability claims to appear more responsible. Common examples of greenwashing include showing sustainability initiatives that represent only small parts of the business’s operations and using environmentally friendly language while continuing environmentally harmful activities.
ESG screening detects greenwashing by identifying disrepancies between public claims and actual behaviour of companies. Analysing adverse media, regulatory actions, NGO reports, enforcement records can reveal the false claims. Greenwashing can lead to regulatory penalties and enforcement risks.
How Should ESG Screening Be Integrated With AML and KYC Systems?
ESG screening should be integrated into already existing AML and KYC systems to truly be effective. It is important to have unified risk scoring. ESG indicators like human rights concerns, environmental violations, governance failures should affect the same risk assessment models used for AML, sanctions and customer due diligence (CDD).
Shared customer profiles also can help this integration. ESG, adverse media, sanctions, and KYC findings data should be accessible within a single customer record to avoid further confusion.
Integration also helps support cross-functional compliance workflows. Alerts can be escalated more quickly nd effectively and investigations can be coordinated when ESG, AML, KYC teams work from the same system and data.
With integration, duplication and alert fatigue can be reduced. Separate screening tools may lead to overlapping alerts for the same issues, creating slowed response times and unnecessary work. Weakening controls can be prevented by integration.
How Can Sanction Scanner Help?
Sanction Scanner can help companies by integrating ESG screening into their already existing AML, KYC, sanctions compliance frameworks without trouble. Sanction Scanner combines sanctions, PEP, adverse media, and ESG-relevant risk indicators into a single platform. So, companies can detect ESG risks as well as financial crime risks, creating a unified protection.
