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To manage the risk associated with non-compliance of a commercial client/investee with applicable environmental and social laws, financial institutions should avoid financing a commercial client/investee whose activities do not comply with applicable national environmental and social laws unless the client/investee agrees to a corrective action plan.

The financial institution is required to verify as part of its environmental and social due diligence process that the commercial client/investee complies with all applicable environmental and social laws. To do so, the financial institution needs to be knowledgeable of the environmental and social laws of the country in which it operates. A good understanding of the applicable environmental and social laws ensures that the financial institution will effectively identify and assess the key environmental and social risks that might be associated with a financial transaction.

If non-compliance with applicable environmental and social laws are identified and depending on the severity of the issue, the financial institution can require the commercial client/investee to develop a corrective action plan for addressing the issue within a reasonable timeframe and stipulate this as a condition of the financial transaction with the commercial client/investee.

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