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By developing procedures, E&S assessment tools and internal capacity to identify and manage environmental and social risks as part of the risk appraisal process for financial transactions – a Environmental and Social Management System or ESMS – a financial institution can manage its exposure to overall risk.

An ESMS consists of several components, including a financial institution’s E&S policy, procedures and designated staff with responsibility for implementation. It should be designed to manage the level of environmental and social risk that the financial institution is exposed to through its portfolio.

Developing an ESMS is most effective and efficient if it is supported by senior management and integrated with a financial institution’s existing risk management framework. Once approved by senior management, the ESMS can be implemented across the financial institution.

Through the financing of their clients or investments in enterprises, financial institutions play a vital role in the development of economies and are in a unique position to promote socially and environmentally sustainable development outcomes. If clients/investees engage in activities that present a potential environmental and social risk, financial institutions can encourage their clients/investees to identify and mitigate these risks. Understanding the environmental and social challenges the world is facing and capturing the opportunities that can be derived from them can prove to be a defining aspect of the success of today’s financial institutions.

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