Climate Risk: The New Frontier of Financial Crime
- Elizabeth Travis
- Jun 6
- 5 min read

Introduction: A New Era of Converging Risks
The climate crisis has triggered unprecedented shifts across the global economy. From the rise of sustainable finance to the transformation of corporate governance standards, the urgency to transition towards a greener future is reshaping financial systems. Yet, as new opportunities emerge, so too do new vulnerabilities. One of the most underappreciated risks is the growing intersection between climate risk and financial crime. Increasingly, environmental and sustainability initiatives are being exploited by criminal actors, posing profound challenges for financial institutions, regulators, and businesses worldwide.
Climate Risk as a Driver of Financial Crime
Climate-related financial flows now amount to trillions of dollars annually, spread across renewable energy projects, carbon markets, biodiversity investments, and climate adaptation programs. This scale and complexity create significant openings for fraud, corruption, and money laundering.
Green financing, once a niche sector, has become mainstream, attracting not only legitimate investors but also sophisticated fraudsters. In 2023, Australian authorities uncovered a $500 million green bonds fraud, where a renewable energy company overstated its environmental impacts to secure major investments. Fraudulent green projects, fake carbon offset schemes, and exaggerated sustainability claims, often referred to as 'greenwashing', are proliferating. In many cases, projects that purport to offer substantial environmental benefits exist only on paper, with investors lured by promises of outsized returns coupled with moral incentives.
Corruption linked to climate initiatives is also a growing concern. In East Africa, investigative reports have highlighted how senior officials diverted millions of dollars intended for climate resilience projects into personal offshore accounts, undermining critical drought and flood mitigation efforts. In regions where governance is weak, climate adaptation funds and environmental subsidies have become new targets for bribery and embezzlement. Large infrastructure projects, such as renewable energy plants or coastal defenses, often involve opaque procurement processes where politically exposed persons (PEPs) may exert undue influence.
Environmental crimes, such as illegal logging, mining, and waste dumping, generate massive illicit proceeds that are laundered through the global financial system. The illegal timber trade alone is estimated to generate up to $152 billion annually, with laundered profits hidden through complex trade-based money laundering schemes involving false documentation and shell companies. Criminal networks exploit weaknesses in supply chains, often disguising the origins of illegally sourced goods as legitimate products. The increasing demand for "sustainable" supply chains paradoxically fuels opportunities for document forgery, fake certifications, and misrepresentation.
Furthermore, emerging carbon markets present significant money laundering risks. In one notable case, Europol dismantled a criminal network that used fake carbon credit trading platforms to defraud investors out of €80 million, laundering the proceeds through cryptocurrency exchanges and offshore accounts. The lack of standardised regulations, coupled with the intangible nature of carbon credits, creates an environment where illicit actors can obscure the origin of funds and assets. Criminals may engage in complex trading activities involving shell companies, cross-border transfers, and unverifiable emissions reductions.
Regulatory Recognition & Response
Regulators have begun to take serious notice of the link between climate risk and financial crime. The Financial Action Task Force (FATF) has formally recognised environmental crimes as predicate offenses for money laundering, emphasizing the need for vigilance in monitoring environmental crime-linked proceeds. The EU's Green Deal and its Sustainable Finance Disclosure Regulation (SFDR) mandate that financial institutions integrate sustainability risks into their investment and governance processes, creating both obligations and liabilities for firms that fail to detect greenwashing or fraudulent activities.
In the UK, the Financial Conduct Authority (FCA) has stressed the need for regulated firms to manage climate-related risks, not merely from a reputational standpoint but as a matter of financial integrity and prudential soundness. Meanwhile, the Basel Committee on Banking Supervision has warned that climate risks pose a threat to the stability of financial institutions, necessitating the integration of climate considerations into broader risk management frameworks, including anti-money laundering (AML) controls.
These regulatory developments signal a critical evolution: climate risk is no longer an optional or peripheral concern. It must be treated as a core component of compliance, governance, and enterprise risk management.
Implications for Financial Institutions
For financial institutions, the implications of this risk convergence are profound. Traditional financial crime detection models are often ill-suited to identify and mitigate the unique risks posed by climate-related activities. Firms must move beyond narrow definitions of financial crime and develop integrated frameworks that address the environmental dimensions of fraud, corruption, and money laundering.
Risk assessments should be updated to incorporate typologies associated with green financing, carbon trading, and environmental supply chains. Due diligence processes must verify environmental claims, relying on independent certifications and third-party audits where possible. For instance, verifying the legitimacy of carbon offsets requires tracing the certification source and ensuring the project genuinely delivers measurable emissions reductions. Enhanced monitoring mechanisms are necessary for transactions linked to high-risk jurisdictions or sectors vulnerable to environmental exploitation.
Financial crime teams must receive specialised training to recognise climate-related red flags, including unverifiable project impacts, shell entities in carbon markets, or charities operating as fronts for environmental crime. Red flags such as sudden surges in donations to climate-linked charities in high-risk countries, or carbon trading platforms with no physical address, should prompt closer scrutiny. Supply chain monitoring must be strengthened to ensure that sustainability claims are substantiated by traceable documentation and verifiable practices.
Most critically, financial institutions must foster a culture that values ethical sustainability. Protecting the environment and maintaining financial integrity must be understood not as competing objectives but as mutually reinforcing responsibilities.
Conclusion: Building a Resilient Future
The fight against climate change and the fight against financial crime are now inseparable. Criminal actors are adept at exploiting emerging markets and regulatory gaps, and the climate transition represents both a moral imperative and a significant financial risk.
Institutions that fail to recognise the convergence of climate risk and financial crime expose themselves to legal, regulatory, and reputational damage, while also undermining the global drive towards sustainability. Building resilience requires integrating climate considerations into every aspect of compliance, governance, and risk management.
By developing new capabilities to detect and prevent the abuse of climate-related financial flows, financial institutions can safeguard their operations and play a vital role in advancing the credibility and integrity of the global climate movement.
Is Your Financial Crime Framework Ready for the Climate Era?
At OpusDatum, we understand that the convergence of climate risk and financial crime demands more than awareness; it requires decisive, forward-thinking action. Our specialists can help you embed environmental risk considerations into your financial crime compliance frameworks, enhancing your resilience against emerging threats.
Whether you need to strengthen due diligence processes, verify climate-linked investments, or develop red flag indicators for greenwashing and environmental crime, we provide practical, tailored solutions.
Contact us today to discuss how we can future-proof your compliance strategy for the climate era.