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More and more financial institutions are now convinced that environmental and social risks of clients need to be considered and that this can be done effectively by incorporating environmental and social risk into risk management processes.

Business Case for Managing E&S Risks
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In recent years, financial institutions – in particular those that are operating at the international level or have positioned themselves as “sustainable” or “green” – have developed a ESMS and associated policies and procedures because they see the strong business case for E&S risk management.

Some financial institutions continue to be uncertain about the importance and benefits of addressing environmental and social risk. A few financial institutions, such as those that operate in smaller markets or engage in financial transactions with low perceived environmental and social risk, may argue that a Environmental and Social Management System (ESMS) is not relevant to their financial performance or that it increases transaction costs without bringing financial benefits. Also, some financial institutions may feel that environmental and social risk management provides no value-added to their portfolio and consider “green” markets as niche products in which their clients/investees are not interested.

Regardless of the size or type of financial institution, the type of financial transactions involved and the market in which it operates, a financial institution can benefit from environmental and social risk management by using it to improve its overall risk management, identify new environmental business opportunities, and add value to their clients and investees, thus gaining a competitive advantage.

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