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While financial institutions may consider that the environmental and social risks of their clients/investees are not relevant to them because their exposure to those risks is indirect, they are directly exposed to credit, liability and reputational risks arising from E&S issues associated with their clients. Having a Environmental and Social Management System enables a financial institution to systematically assess the risk of each transaction in relation to credit, liability and reputational risk, by looking for example at risks related to industry sector and geographic region.

Although exposure to some level of environmental and social risk is unavoidable, an ESMS improves the ability of a financial institution to manage its portfolio and effectively control overall risk exposure. Focusing on environmental and social risk that can result in financial, legal and/or reputational damage also helps a financial institution to ensure its long-term financial viability.

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