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Sanctions compliance converges with ESG
08 Jul 2026
Tahlia Kraefft explores how sanctions compliance is progressively changing past being solely a regulatory requirement and becoming embedded as an informal component of the governance pillar of ESG
Image: reidl/stock.adobe.com
From traditional to geopolitical ESG
Russia’s invasion of Ukraine in 2022 altered how financial institutions consider non-financial risk.
The conflict forced institutional investors and regulators to review designated entities and country risk beyond legal compliance as measurements of corporate governance and financial resilience.
Regulators in various jurisdictions swiftly responded to the invasion with an expansion of sanctions, asset freezes, limitations imposed on securities, and expulsion of financial organisations from global markets.
Quickly this led to frozen assets, Russian securities becoming untradeable, settlement collapse, counterparty risk, and upended regulatory obligations.
The disciplinary measures aimed at Russia and Belarus, demonstrated how the effects of geopolitical events can quickly ripple across investment operations, custody, asset servicing, and fund administration. Furthermore, it highlighted how adequate sanctions can be a measurement of operational resilience and responsible business administration.
Environmental, social, and governance (ESG) frameworks have converged with sanctions compliance and geopolitical risk, moving corporate metrics from voluntary sustainability frameworks into legal obligations.
Adverse impacts on operations, valuations, and investor returns from these geopolitical risks have moved investors, regulators, and clients to require firms to show strong sanctions compliance along with conventional governance controls.
The governance agenda of ESG has broadened to encompass a framework for assessing geopolitical and sanctions exposure, with country risk being treated under this pillar, illustrating a development in how systematic risk is managed.
James Ford, a counsel at A&O Shearman says the conversation around ESG has materially expanded, from being primarily treated through scope of climate, diversity, human rights and board governance: “Today, companies and investors alike overlay several other risks that often speak to a company’s licence to operate under the ESG umbrella including navigating geopolitical risk, conflicts of law and blocking statutes, sanctions, export controls, forced labour concerns in supply chains,
Country risk factors have been a related consideration for a long time when finding and assessing supply chain risks especially in connection to bribery and corruption, sanctions and human rights concerns, he notes.
“Country risk considerations have become more nuanced as the regulatory landscape has become increasingly complex. For example, the current focus of UK, EU and US regulators on sanctions circumvention has increased the risks associated with doing business with certain countries in Central Asia”
He says many multinational companies are progressively taking a holistic approach to enterprise risk management: “Ten years ago, a company might have had a standalone programme for the management of anti-bribery and corruption, anti-money laundering, sanctions and environmental risks. Today, large multinationals typically incorporate consideration of these risks – and more – in their enterprise third party risk management programmes, including in relation to the onboarding of business partners and the review of high-risk suppliers.”
Sanctions no longer limited to compliance concerns
Sanctions compliance is falling into the ESG conversation due to its inseparable tie to the governance and social (S) components of ESG. It is being treated more and more adjacent to ESG and wider sustainability risk management. Firms can be exposed to significant regulatory fines and reputational harm if they neglect screening for sanctioned entities and are at risk of breaching anti-corruption, ethical business practices, and human right ethics. Modern corporate governance requires boards to supervise sanctions risk, to guarantee organisations are adhering to its legal and ethical responsibilities. Treating sanctions compliance as part of the wider Enterprise Risk Management (ERM) enables firms to approach geopolitical threats as key business risks compared to disconnected operational concerns. Sanctions and financial crime laws are developing along with sustainability requirements, obliging firms to adhere to local and global legal guidelines such as the UK Corporate Governance Code or EU requirements. Sanctions have moved past being only a compliance matter to become proof of effective corporate governance. Investors increasingly view geopolitical resilience as financially material.
Historically sanctions were treated principally as a regulatory compliance concern compared to a driver of investment strategy, according to Antoine Pertriaux, director of risk and compliance at Protiviti. He says this was primarily due to the sanctions landscape being relatively stable and high-jurisdictions well understood industry-wide. Due to growing geopolitical fragmentation and uncertainty this assumption no longer holds.
“Sanctions and geopolitical developments have a direct impact on asset valuations, liquidity, exit opportunities, and overall portfolio resilience. For investors, the question is no longer simply whether an investment complies with today’s sanctions, but whether it will remain investable if the geopolitical landscape changes tomorrow.
“It has become much more than a pure compliance issue. The Russia-Ukraine conflict accelerated this shift. It showed that even a major G20 economy could become largely inaccessible to investors, with securities effectively becoming untradeable almost overnight.”
Sanctions and country risk were viewed largely as a compliance issue only three or four years ago Nitesh Patel, TMF Group’s business development director for Funds, comments.
This meant it was normal for it to purely involve a screening exercise during onboarding, followed by just a periodic review.
Patel explains that given the pace and reach of sanctions regimes once static compliance checks are no longer adequate.
Regimes are now amended monthly, sometimes weekly and the coverage has expanded beyond named individuals and entities, he says.
Jurisdictional corridors, ownership structures, and even categories of counterparty behaviour such as shadow fleets, crypto settlement rails, and third-country circumvention are now included.
He says this is a fundamentally different risk profile than a more traditional static blacklist.
“This explains why country and sanctions exposure are increasingly seen as a governance matter. If a fund’s exposure to a jurisdiction or counterparty can change between quarterly reporting cycles, then the question stops being ‘did we screen at onboarding?’ and becomes ‘does our governance framework have the monitoring cadence and escalation authority to catch and respond to that change in real time?’”
“That’s a board and general partner-level accountability question, not just a back office compliance one. Investors are asking GPs directly how sanctions and geopolitical risk are governed at the fund level. That is, who owns it, how often it’s reviewed and what the escalation path looks like, in the same way they’d ask about conflicts of interest or valuation governance.”
Sanctions risk a core part of geopolitical risk management
Recent sanctions regimes, directed at Russia and Belarus, have demanded the asset servicing sector to modernise its supervision of due diligence, asset freezing, and supply chain tracing. Regulatory authorities have escalated their enforcement targeting illicit trade in Russia and Belarus, especially the ‘shadow fleet’ of tankers employed to avoid oil price caps to affect the financing and servicing of these networks. Wide restrictions have been imposed on providing trust services, investment guidance, and associated corporate facilities to designated Russian entities. The UK government implemented stringent end-use controls enabling the government to bar valid transactions if they pose a threat to disrupting the efficiency of current sanctions. These string of sanctions directed at Russia and Belarus illustrated how fast firms can be deprived access to markets and assets.
Companies that conduct business in sanctioned or high-risk jurisdictions, regions in the midst of conflict or geopolitical tensions, experience regulatory risk, operational disturbance, reputational loss, and potential barring from investment portfolios. Now investors require information on firms that have revenue exposure to designated nations, along with the extent that supply chains are reliant on politically sensitive jurisdictions, and if future sanctions could impact asset values.
Sanctions risk is evidently becoming more material as part of wider geopolitical and portfolio risk assessments, according to Ralph Williams, director of EMEA Insights at Broadridge. However, sanctions risk will not become a typical component of ESG in a similar way environmental or governance metrics have become standardised, he says. Sanctions are less being absorbed into ESG due diligence, but sanctions exposure is becoming one factor within a broader risk framework that also encompasses tariffs, less predictable policymaking, supply-chain resilience, and wider geopolitical instability.
On the investment side the response has been more visible through regional and thematic allocation, than through explicit sanctions-focused products or changes in ESG strategies, he comments.
“We are seeing a greater regional divide, with more interest in areas such as emerging market ex-China, global ex-US funds, European equity, and European autonomy strategies. But there is little evidence yet of a large, explicit “sanctions risk” allocation category.
“Geopolitical funds remain marginal, while European autonomy funds often express these concerns through supply-chain resilience, defence, infrastructure, energy security and industrial self-sufficiency.”
Williams emphasises that sanctions risk is becoming increasingly important and more material, but not necessarily as ESG.
“It is becoming part of mainstream geopolitical risk management and asset-allocation decision-making.”
ESG, anti-money laundering (AML)/sanctions, and financial crime due diligence are converging into a single due discipline, particularly around beneficial ownership, supply chains, and counterparty screening, Patel explains, rather than sanctions becoming a part of ESG.
“For institutional investors and fund managers, this adds operational requirements around look-through ownership screening on investors and portfolio companies, geographic concentration and country-risk scoring as part of investment committee papers.”
Enhanced due diligence triggers linked to certain jurisdictions or transaction types are also added, he notes.
“It’s becoming material because sanctions exposure can crystallise a loss, a liquidity problem, or a reputational event that can occur on short notice”
According to Pertriaux, geopolitical risk and sanctions are emerging as core investment risks that sit alongside ESG and increasingly interact with it, rather than becoming a fourth pillar of ESG.
“Where the convergence happens is in governance. Investors increasingly expect boards and management to identify, oversee, and manage geopolitical and sanctions exposure as part of good corporate governance. The question is no longer simply whether a company complies with sanctions today, but whether it is resilient in an increasingly fragmented geopolitical environment.”
Ford comments that multinational organisations have always been obliged to comply with applicable sanctions especially because of their stringent liability nature in specific jurisdictions such as the UK and US.
“Multinational organisations have always had obligations to ensure compliance with applicable sanctions, including because of their strict liability nature in certain jurisdictions, for example the UK and US.”
He says a sanctions risk assessment of a counterparty’s ownership and control structure and of certain transactions or business dealings has progressively been incorporated into a wider ESG or third-party due diligence framework.
“Where activities are clearly prohibited by applicable sanctions, an investment decision is relatively straightforward. The more interesting question is where investors are contemplating activities that are permissible under sanctions today, but that are in jurisdictions and/or sectors that generally face heightened sanctions risk in future.
“In that respect, one observation is that companies are increasingly incorporating more robust contractual protections to afford certain rights in the event that sanctions issues arise in the future.
Ford explains that an additional factor that may affect investment decision-making in practice is that investors may have made sanctions-related representations and undertakings to third parties such as banks and insurers, that impact an investment independent of the regulatory stance.
A shifting sanctions landscape
Geopolitical shocks have the potential to rapidly reshape a nation’s investment profile through means such as sanctions and capital controls, resources inaccessibility, and fiscal drain. Embargos and asset freezes fast limit liquidity, bar international debt payments, and push abrupt currency devaluations.
Conflicts disturb commodity supply chains such as energy and agriculture, and lower a country’s export capabilities and environment measurements. Furthermore war costs and localised instability result in governments moving funding from longer sustainability goals to manage immediate debt crises, essentially altering their ESG profile.
The sanctions landscape is continually changing, Ford explains. The dramatic increase in Western sanctions targeting Russia, from 2022 has presented new challenges on a daily basis.
“More recently, the rise in countersanctions measures — for example in Russia and China — coupled with unilateral changes in approach by the United States under certain regimes — e.g. Iran and Cuba — have created different challenges for international businesses that may find themselves stuck between a rock and a hard place, as they may be required to comply with multiple conflicting sanctions regimes.”
In practice this could be more acute, he says, where an asset servicer is obliged to comply with divergent sanctions regimes compared with the investee companies in the portfolios they handle.
“To manage these risks, asset servicers should seek to review and assess the scope and effectiveness of their existing sanctions compliance programme, including reviewing their existing sanctions screening processes, ensuring that compliance with key US, EU, and UK sanction regimes is adopted as a baseline and ensuring that there are effective escalation processes in place in the event sanctions red flags emerge in respect of an investee company.
Asset managers are at the forefront of these challenges, more than asset servicers, Pertriaux notes. It is no longer adequate for firms to screen names against sanctions lists, they must also analyse ownership structures and business activities on a continuous basis to identify potential direct or indirect exposure to existing and future sanctions, and assess the resilience of their portfolios.
“As a result, investment guidelines teams are taking on a more strategic role. They work closely with portfolio managers, compliance, and risk teams to translate evolving geopolitical developments and sanctions regimes into actionable investment restrictions and client-specific guidelines.”
Patel says the requirement to screen the right layer continuously is a challenge, from their perspective in administering funds and their underlying structures. It is no longer adequate to screen the fund’s direct limited partners (LPs) at subscription.
Regimes obligate increasingly look-through to beneficial owners and to counterparties and jurisdictional corridors that weren’t in scope previously. It requires ongoing screening across multiple layers of ownership.
Keeping pace with the update cycle is an additional hurdle, as sanctions list and designations are frequently changing across the US, UK, EU, and other regimes simultaneously, Patel comments.
They do not always align, as a counterparty can be sanctioned in one regime and not another, and sanctions can be applied extraterritorially. “To deal with this, administrators need screening technology and processes that update continuously and can reconcile divergent regimes rather than a single static list.”
Valuing and reporting on frozen or restricted assets is an added obstacle, Patel continues: “When an asset becomes subject to sanctions, there are real operational questions. For example, how is it valued, how is it disclosed to investors, how are distributions or capital calls handled if funds are frozen mid-cycle? This is squarely an administrator and depositary responsibility, and it’s a much harder problem than standard valuation policy anticipates.”
Lastly, he remarks that cross-border data and reporting consistency poses a challenge as global managers running funds across multiple domiciles demand consistent sanctions and country-risk reporting across those structures.
He says this is more difficult than it sounds when local regulatory interpretations differ.
Growing client expectations
Customers are progressively demanding transparency, requiring asset servicers to demonstrate strong controls along with analytics and tools that provide visibility into geopolitical exposure. Institutional investors and increasingly, their own regulators and boards are requesting real-time or near-real-time visibility as opposed to one-off assurances, Patel remarks. A sanctions attestation at onboarding and an annual compliance certification was adequate a few years ago.
“Now, LPs want to know the cadence of ongoing screening, how quickly a new designation would be identified and escalated, and what the fund’s actual exposure looks like today, not at the last reporting date.”
Additionally there is a transparency expectation shift with investors demanding country and counterparty risk broken out explicitly in reporting, compared to just folded into a generic risk narrative. He says this is driving administrators and managers toward more granular, more regular and more auditable reporting.
“This means, essentially, treating sanctions and geopolitical exposure with the same rigour as liquidity or concentration risk reporting.”
Clients more and more expect their asset managers to actively monitor geopolitical risk, Pertriaux, states. “They are asking for forward-looking geopolitical risk indicators, country risk analysis, and continuous monitoring rather than periodic or annual reviews. The question is no longer simply, ‘are we compliant?, it’s ‘what emerging risks could affect my portfolio tomorrow?’”
Client expectations are clearly rising according to Williams. Risk management as a fund selection criterion is up around five percentage points since 2023 among European fund buyers Broadridge interviewed, he says, being mentioned by a quarter of interviewees in Q1 2026. Also information provision, reporting and transparency has risen as a criterion in recent quarters to match risk management at around 25 per cent, although it is still below the previous (ESG-linked) peak he notes.
“What stands out is that reporting and transparency remains the number one area selectors want managers to improve, mentioned in 36 percent of interviews as a top improvement need. Geopolitical events have accelerated this: clients want managers to explain exposures quickly, clearly and in context, not just after the fact.”
Ford says clients are more and more looking at how they can engage technological tools to assist continuous risk monitoring including carrying out real-time monitoring to flag relevant updates to sanctions list and adverse media lists in respect of counterparties.
“In parallel, regulators have heightened expectations of companies to proactively manage sanctions-related risks and to have in place an increasingly sophisticated sanctions compliance programme.”
A strategic investment risk
Investors need to treat geopolitical risk as a strategic investment risk rather than purely a compliance issue, and change from point-in-time due diligence to ongoing monitoring of their exposures, Pertriaux notes.
“Many institutional investors have already started to make this shift, integrating geopolitical risk into their investment decision-making to varying degrees. The challenge now is to make that approach more consistent, proactive, and embedded across the investment process.”
Patel says from an operational vantage point of view some strategies for institutional investors enhancing how they treat geopolitical and sanctions risk including building continuous monitoring into governance, instead of solely compliance, and viewing sanctions and country risk exposure as a standing agenda item for investment committees and boards, rather than a once-a-year compliance sign-off.
Furthermore investors should ask for look-through, not headline-level screening from managers and administrators, as headline entity screening misses a lot of the risk that is now positioned in ownership structures and third-country intermediaries. He suggests scenario-planning for the “trapped asset” problem, not just the “prohibited counterparty” issue.
He remarks: “A lot of investor attention still goes to avoiding sanctioned entities upfront, but less goes to what happens operationally if an existing holding becomes restricted mid-life.”
Finally he recommends request jurisdictional diversification in service providers, not just in the portfolio: “If your administrator, custodian or depositary has concentrated operational exposure to a single jurisdiction under geopolitical strain, that’s a supply-chain risk to your own fund operations.”
Ford says institutional investors should explore revamping their playbooks for different geopolitical scenarios: “Following the rapid expansion of sanctions targeting Russia from February 2022 onwards, some investors have sought to reduce their exposure to Russia in their investment decisions while others have developed playbooks relating to China in the event of a conflict emerging between China and Taiwan.”
Sanctions regimes posing high risk
Engaging in activities involving Russia continues to be challenging due to the breadth of individuals and companies designated as targets of US, EU, and UK sanctions, Ford notes. Operating in sectors in the Soviet Union that are subject to extensive restrictions such as finance, oil, gas, and defence poses high risk. China is another complex jurisdiction for Western companies to manage, Ford explains, especially in technology and heavy industry: “On the one hand, there has been a significant expansion of US export controls targeting China, which can have implications for corporates and investors alike; on the other hand, China has in place countersanctions measures that preclude certain businesses operating in China from complying with certain Western sanctions, which can leave companies stuck between a rock and a hard place where compliance with one set of laws will result in a breach of countersanctions measures.” Ford adds the sanction regimes most impacting asset servicers depends on which jurisdictions they operate.
Country-specific sanctions remain the most operationally complex, according to Patel. He says this is due to the volume and pace of designations across the US, UK and EU, and with enforcement moving decisively toward third-country intermediaries and circumvention networks.
“Central Asian and Caucasus jurisdictions, parts of the Gulf, and certain regional Chinese and Southeast Asian financial institutions have all been flagged by regulators as elevated-risk corridors for circumvention, even though they aren’t sanctioned jurisdictions themselves. The broader trend is the extraterritorial reach of sanctions regimes, which means that asset servicers with global books of business need to think about exposure well beyond their own domicile’s sanctions list.”
The increasing use of crypto and virtual asset rails for sanctions evasion is forcing asset servicers into a due diligence area for digital asset settlement infrastructure. Although quite far from traditional fund administration competency, it is increasingly relevant, Patel notes.
Conclusion
The sanctions imposed on Russia since its 2022 invasion of Ukraine upended the expectations of governance throughout the financial industry. With geopolitical risks further shaping international markets, sanction compliance is more and more seen as a quantitative measurement of robust ESG governance. It indicates an organisation’s capability to oversee risk, maintain market integrity, and safeguard clients. In this context, asset servicers have assumed a role as key gatekeepers for legal compliance, operational resilience, and responsible conduct.
Russia’s invasion of Ukraine in 2022 altered how financial institutions consider non-financial risk.
The conflict forced institutional investors and regulators to review designated entities and country risk beyond legal compliance as measurements of corporate governance and financial resilience.
Regulators in various jurisdictions swiftly responded to the invasion with an expansion of sanctions, asset freezes, limitations imposed on securities, and expulsion of financial organisations from global markets.
Quickly this led to frozen assets, Russian securities becoming untradeable, settlement collapse, counterparty risk, and upended regulatory obligations.
The disciplinary measures aimed at Russia and Belarus, demonstrated how the effects of geopolitical events can quickly ripple across investment operations, custody, asset servicing, and fund administration. Furthermore, it highlighted how adequate sanctions can be a measurement of operational resilience and responsible business administration.
Environmental, social, and governance (ESG) frameworks have converged with sanctions compliance and geopolitical risk, moving corporate metrics from voluntary sustainability frameworks into legal obligations.
Adverse impacts on operations, valuations, and investor returns from these geopolitical risks have moved investors, regulators, and clients to require firms to show strong sanctions compliance along with conventional governance controls.
The governance agenda of ESG has broadened to encompass a framework for assessing geopolitical and sanctions exposure, with country risk being treated under this pillar, illustrating a development in how systematic risk is managed.
James Ford, a counsel at A&O Shearman says the conversation around ESG has materially expanded, from being primarily treated through scope of climate, diversity, human rights and board governance: “Today, companies and investors alike overlay several other risks that often speak to a company’s licence to operate under the ESG umbrella including navigating geopolitical risk, conflicts of law and blocking statutes, sanctions, export controls, forced labour concerns in supply chains,
Country risk factors have been a related consideration for a long time when finding and assessing supply chain risks especially in connection to bribery and corruption, sanctions and human rights concerns, he notes.
“Country risk considerations have become more nuanced as the regulatory landscape has become increasingly complex. For example, the current focus of UK, EU and US regulators on sanctions circumvention has increased the risks associated with doing business with certain countries in Central Asia”
He says many multinational companies are progressively taking a holistic approach to enterprise risk management: “Ten years ago, a company might have had a standalone programme for the management of anti-bribery and corruption, anti-money laundering, sanctions and environmental risks. Today, large multinationals typically incorporate consideration of these risks – and more – in their enterprise third party risk management programmes, including in relation to the onboarding of business partners and the review of high-risk suppliers.”
Sanctions no longer limited to compliance concerns
Sanctions compliance is falling into the ESG conversation due to its inseparable tie to the governance and social (S) components of ESG. It is being treated more and more adjacent to ESG and wider sustainability risk management. Firms can be exposed to significant regulatory fines and reputational harm if they neglect screening for sanctioned entities and are at risk of breaching anti-corruption, ethical business practices, and human right ethics. Modern corporate governance requires boards to supervise sanctions risk, to guarantee organisations are adhering to its legal and ethical responsibilities. Treating sanctions compliance as part of the wider Enterprise Risk Management (ERM) enables firms to approach geopolitical threats as key business risks compared to disconnected operational concerns. Sanctions and financial crime laws are developing along with sustainability requirements, obliging firms to adhere to local and global legal guidelines such as the UK Corporate Governance Code or EU requirements. Sanctions have moved past being only a compliance matter to become proof of effective corporate governance. Investors increasingly view geopolitical resilience as financially material.
Historically sanctions were treated principally as a regulatory compliance concern compared to a driver of investment strategy, according to Antoine Pertriaux, director of risk and compliance at Protiviti. He says this was primarily due to the sanctions landscape being relatively stable and high-jurisdictions well understood industry-wide. Due to growing geopolitical fragmentation and uncertainty this assumption no longer holds.
“Sanctions and geopolitical developments have a direct impact on asset valuations, liquidity, exit opportunities, and overall portfolio resilience. For investors, the question is no longer simply whether an investment complies with today’s sanctions, but whether it will remain investable if the geopolitical landscape changes tomorrow.
“It has become much more than a pure compliance issue. The Russia-Ukraine conflict accelerated this shift. It showed that even a major G20 economy could become largely inaccessible to investors, with securities effectively becoming untradeable almost overnight.”
Sanctions and country risk were viewed largely as a compliance issue only three or four years ago Nitesh Patel, TMF Group’s business development director for Funds, comments.
This meant it was normal for it to purely involve a screening exercise during onboarding, followed by just a periodic review.
Patel explains that given the pace and reach of sanctions regimes once static compliance checks are no longer adequate.
Regimes are now amended monthly, sometimes weekly and the coverage has expanded beyond named individuals and entities, he says.
Jurisdictional corridors, ownership structures, and even categories of counterparty behaviour such as shadow fleets, crypto settlement rails, and third-country circumvention are now included.
He says this is a fundamentally different risk profile than a more traditional static blacklist.
“This explains why country and sanctions exposure are increasingly seen as a governance matter. If a fund’s exposure to a jurisdiction or counterparty can change between quarterly reporting cycles, then the question stops being ‘did we screen at onboarding?’ and becomes ‘does our governance framework have the monitoring cadence and escalation authority to catch and respond to that change in real time?’”
“That’s a board and general partner-level accountability question, not just a back office compliance one. Investors are asking GPs directly how sanctions and geopolitical risk are governed at the fund level. That is, who owns it, how often it’s reviewed and what the escalation path looks like, in the same way they’d ask about conflicts of interest or valuation governance.”
Sanctions risk a core part of geopolitical risk management
Recent sanctions regimes, directed at Russia and Belarus, have demanded the asset servicing sector to modernise its supervision of due diligence, asset freezing, and supply chain tracing. Regulatory authorities have escalated their enforcement targeting illicit trade in Russia and Belarus, especially the ‘shadow fleet’ of tankers employed to avoid oil price caps to affect the financing and servicing of these networks. Wide restrictions have been imposed on providing trust services, investment guidance, and associated corporate facilities to designated Russian entities. The UK government implemented stringent end-use controls enabling the government to bar valid transactions if they pose a threat to disrupting the efficiency of current sanctions. These string of sanctions directed at Russia and Belarus illustrated how fast firms can be deprived access to markets and assets.
Companies that conduct business in sanctioned or high-risk jurisdictions, regions in the midst of conflict or geopolitical tensions, experience regulatory risk, operational disturbance, reputational loss, and potential barring from investment portfolios. Now investors require information on firms that have revenue exposure to designated nations, along with the extent that supply chains are reliant on politically sensitive jurisdictions, and if future sanctions could impact asset values.
Sanctions risk is evidently becoming more material as part of wider geopolitical and portfolio risk assessments, according to Ralph Williams, director of EMEA Insights at Broadridge. However, sanctions risk will not become a typical component of ESG in a similar way environmental or governance metrics have become standardised, he says. Sanctions are less being absorbed into ESG due diligence, but sanctions exposure is becoming one factor within a broader risk framework that also encompasses tariffs, less predictable policymaking, supply-chain resilience, and wider geopolitical instability.
On the investment side the response has been more visible through regional and thematic allocation, than through explicit sanctions-focused products or changes in ESG strategies, he comments.
“We are seeing a greater regional divide, with more interest in areas such as emerging market ex-China, global ex-US funds, European equity, and European autonomy strategies. But there is little evidence yet of a large, explicit “sanctions risk” allocation category.
“Geopolitical funds remain marginal, while European autonomy funds often express these concerns through supply-chain resilience, defence, infrastructure, energy security and industrial self-sufficiency.”
Williams emphasises that sanctions risk is becoming increasingly important and more material, but not necessarily as ESG.
“It is becoming part of mainstream geopolitical risk management and asset-allocation decision-making.”
ESG, anti-money laundering (AML)/sanctions, and financial crime due diligence are converging into a single due discipline, particularly around beneficial ownership, supply chains, and counterparty screening, Patel explains, rather than sanctions becoming a part of ESG.
“For institutional investors and fund managers, this adds operational requirements around look-through ownership screening on investors and portfolio companies, geographic concentration and country-risk scoring as part of investment committee papers.”
Enhanced due diligence triggers linked to certain jurisdictions or transaction types are also added, he notes.
“It’s becoming material because sanctions exposure can crystallise a loss, a liquidity problem, or a reputational event that can occur on short notice”
According to Pertriaux, geopolitical risk and sanctions are emerging as core investment risks that sit alongside ESG and increasingly interact with it, rather than becoming a fourth pillar of ESG.
“Where the convergence happens is in governance. Investors increasingly expect boards and management to identify, oversee, and manage geopolitical and sanctions exposure as part of good corporate governance. The question is no longer simply whether a company complies with sanctions today, but whether it is resilient in an increasingly fragmented geopolitical environment.”
Ford comments that multinational organisations have always been obliged to comply with applicable sanctions especially because of their stringent liability nature in specific jurisdictions such as the UK and US.
“Multinational organisations have always had obligations to ensure compliance with applicable sanctions, including because of their strict liability nature in certain jurisdictions, for example the UK and US.”
He says a sanctions risk assessment of a counterparty’s ownership and control structure and of certain transactions or business dealings has progressively been incorporated into a wider ESG or third-party due diligence framework.
“Where activities are clearly prohibited by applicable sanctions, an investment decision is relatively straightforward. The more interesting question is where investors are contemplating activities that are permissible under sanctions today, but that are in jurisdictions and/or sectors that generally face heightened sanctions risk in future.
“In that respect, one observation is that companies are increasingly incorporating more robust contractual protections to afford certain rights in the event that sanctions issues arise in the future.
Ford explains that an additional factor that may affect investment decision-making in practice is that investors may have made sanctions-related representations and undertakings to third parties such as banks and insurers, that impact an investment independent of the regulatory stance.
A shifting sanctions landscape
Geopolitical shocks have the potential to rapidly reshape a nation’s investment profile through means such as sanctions and capital controls, resources inaccessibility, and fiscal drain. Embargos and asset freezes fast limit liquidity, bar international debt payments, and push abrupt currency devaluations.
Conflicts disturb commodity supply chains such as energy and agriculture, and lower a country’s export capabilities and environment measurements. Furthermore war costs and localised instability result in governments moving funding from longer sustainability goals to manage immediate debt crises, essentially altering their ESG profile.
The sanctions landscape is continually changing, Ford explains. The dramatic increase in Western sanctions targeting Russia, from 2022 has presented new challenges on a daily basis.
“More recently, the rise in countersanctions measures — for example in Russia and China — coupled with unilateral changes in approach by the United States under certain regimes — e.g. Iran and Cuba — have created different challenges for international businesses that may find themselves stuck between a rock and a hard place, as they may be required to comply with multiple conflicting sanctions regimes.”
In practice this could be more acute, he says, where an asset servicer is obliged to comply with divergent sanctions regimes compared with the investee companies in the portfolios they handle.
“To manage these risks, asset servicers should seek to review and assess the scope and effectiveness of their existing sanctions compliance programme, including reviewing their existing sanctions screening processes, ensuring that compliance with key US, EU, and UK sanction regimes is adopted as a baseline and ensuring that there are effective escalation processes in place in the event sanctions red flags emerge in respect of an investee company.
Asset managers are at the forefront of these challenges, more than asset servicers, Pertriaux notes. It is no longer adequate for firms to screen names against sanctions lists, they must also analyse ownership structures and business activities on a continuous basis to identify potential direct or indirect exposure to existing and future sanctions, and assess the resilience of their portfolios.
“As a result, investment guidelines teams are taking on a more strategic role. They work closely with portfolio managers, compliance, and risk teams to translate evolving geopolitical developments and sanctions regimes into actionable investment restrictions and client-specific guidelines.”
Patel says the requirement to screen the right layer continuously is a challenge, from their perspective in administering funds and their underlying structures. It is no longer adequate to screen the fund’s direct limited partners (LPs) at subscription.
Regimes obligate increasingly look-through to beneficial owners and to counterparties and jurisdictional corridors that weren’t in scope previously. It requires ongoing screening across multiple layers of ownership.
Keeping pace with the update cycle is an additional hurdle, as sanctions list and designations are frequently changing across the US, UK, EU, and other regimes simultaneously, Patel comments.
They do not always align, as a counterparty can be sanctioned in one regime and not another, and sanctions can be applied extraterritorially. “To deal with this, administrators need screening technology and processes that update continuously and can reconcile divergent regimes rather than a single static list.”
Valuing and reporting on frozen or restricted assets is an added obstacle, Patel continues: “When an asset becomes subject to sanctions, there are real operational questions. For example, how is it valued, how is it disclosed to investors, how are distributions or capital calls handled if funds are frozen mid-cycle? This is squarely an administrator and depositary responsibility, and it’s a much harder problem than standard valuation policy anticipates.”
Lastly, he remarks that cross-border data and reporting consistency poses a challenge as global managers running funds across multiple domiciles demand consistent sanctions and country-risk reporting across those structures.
He says this is more difficult than it sounds when local regulatory interpretations differ.
Growing client expectations
Customers are progressively demanding transparency, requiring asset servicers to demonstrate strong controls along with analytics and tools that provide visibility into geopolitical exposure. Institutional investors and increasingly, their own regulators and boards are requesting real-time or near-real-time visibility as opposed to one-off assurances, Patel remarks. A sanctions attestation at onboarding and an annual compliance certification was adequate a few years ago.
“Now, LPs want to know the cadence of ongoing screening, how quickly a new designation would be identified and escalated, and what the fund’s actual exposure looks like today, not at the last reporting date.”
Additionally there is a transparency expectation shift with investors demanding country and counterparty risk broken out explicitly in reporting, compared to just folded into a generic risk narrative. He says this is driving administrators and managers toward more granular, more regular and more auditable reporting.
“This means, essentially, treating sanctions and geopolitical exposure with the same rigour as liquidity or concentration risk reporting.”
Clients more and more expect their asset managers to actively monitor geopolitical risk, Pertriaux, states. “They are asking for forward-looking geopolitical risk indicators, country risk analysis, and continuous monitoring rather than periodic or annual reviews. The question is no longer simply, ‘are we compliant?, it’s ‘what emerging risks could affect my portfolio tomorrow?’”
Client expectations are clearly rising according to Williams. Risk management as a fund selection criterion is up around five percentage points since 2023 among European fund buyers Broadridge interviewed, he says, being mentioned by a quarter of interviewees in Q1 2026. Also information provision, reporting and transparency has risen as a criterion in recent quarters to match risk management at around 25 per cent, although it is still below the previous (ESG-linked) peak he notes.
“What stands out is that reporting and transparency remains the number one area selectors want managers to improve, mentioned in 36 percent of interviews as a top improvement need. Geopolitical events have accelerated this: clients want managers to explain exposures quickly, clearly and in context, not just after the fact.”
Ford says clients are more and more looking at how they can engage technological tools to assist continuous risk monitoring including carrying out real-time monitoring to flag relevant updates to sanctions list and adverse media lists in respect of counterparties.
“In parallel, regulators have heightened expectations of companies to proactively manage sanctions-related risks and to have in place an increasingly sophisticated sanctions compliance programme.”
A strategic investment risk
Investors need to treat geopolitical risk as a strategic investment risk rather than purely a compliance issue, and change from point-in-time due diligence to ongoing monitoring of their exposures, Pertriaux notes.
“Many institutional investors have already started to make this shift, integrating geopolitical risk into their investment decision-making to varying degrees. The challenge now is to make that approach more consistent, proactive, and embedded across the investment process.”
Patel says from an operational vantage point of view some strategies for institutional investors enhancing how they treat geopolitical and sanctions risk including building continuous monitoring into governance, instead of solely compliance, and viewing sanctions and country risk exposure as a standing agenda item for investment committees and boards, rather than a once-a-year compliance sign-off.
Furthermore investors should ask for look-through, not headline-level screening from managers and administrators, as headline entity screening misses a lot of the risk that is now positioned in ownership structures and third-country intermediaries. He suggests scenario-planning for the “trapped asset” problem, not just the “prohibited counterparty” issue.
He remarks: “A lot of investor attention still goes to avoiding sanctioned entities upfront, but less goes to what happens operationally if an existing holding becomes restricted mid-life.”
Finally he recommends request jurisdictional diversification in service providers, not just in the portfolio: “If your administrator, custodian or depositary has concentrated operational exposure to a single jurisdiction under geopolitical strain, that’s a supply-chain risk to your own fund operations.”
Ford says institutional investors should explore revamping their playbooks for different geopolitical scenarios: “Following the rapid expansion of sanctions targeting Russia from February 2022 onwards, some investors have sought to reduce their exposure to Russia in their investment decisions while others have developed playbooks relating to China in the event of a conflict emerging between China and Taiwan.”
Sanctions regimes posing high risk
Engaging in activities involving Russia continues to be challenging due to the breadth of individuals and companies designated as targets of US, EU, and UK sanctions, Ford notes. Operating in sectors in the Soviet Union that are subject to extensive restrictions such as finance, oil, gas, and defence poses high risk. China is another complex jurisdiction for Western companies to manage, Ford explains, especially in technology and heavy industry: “On the one hand, there has been a significant expansion of US export controls targeting China, which can have implications for corporates and investors alike; on the other hand, China has in place countersanctions measures that preclude certain businesses operating in China from complying with certain Western sanctions, which can leave companies stuck between a rock and a hard place where compliance with one set of laws will result in a breach of countersanctions measures.” Ford adds the sanction regimes most impacting asset servicers depends on which jurisdictions they operate.
Country-specific sanctions remain the most operationally complex, according to Patel. He says this is due to the volume and pace of designations across the US, UK and EU, and with enforcement moving decisively toward third-country intermediaries and circumvention networks.
“Central Asian and Caucasus jurisdictions, parts of the Gulf, and certain regional Chinese and Southeast Asian financial institutions have all been flagged by regulators as elevated-risk corridors for circumvention, even though they aren’t sanctioned jurisdictions themselves. The broader trend is the extraterritorial reach of sanctions regimes, which means that asset servicers with global books of business need to think about exposure well beyond their own domicile’s sanctions list.”
The increasing use of crypto and virtual asset rails for sanctions evasion is forcing asset servicers into a due diligence area for digital asset settlement infrastructure. Although quite far from traditional fund administration competency, it is increasingly relevant, Patel notes.
Conclusion
The sanctions imposed on Russia since its 2022 invasion of Ukraine upended the expectations of governance throughout the financial industry. With geopolitical risks further shaping international markets, sanction compliance is more and more seen as a quantitative measurement of robust ESG governance. It indicates an organisation’s capability to oversee risk, maintain market integrity, and safeguard clients. In this context, asset servicers have assumed a role as key gatekeepers for legal compliance, operational resilience, and responsible conduct.
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