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The procedures and tools for conducting environmental and social due diligence for a corporate finance transaction are described in a financial institution’s Environmental and Social Management System and should include the following steps as part of a desktop review and a site visit:

  • Screen client’s/investee’s activities against a list of excluded activities adopted by the financial institution;
  • Review of industry sector and environmental and social issues that are typically associated with this type of operation;
  • Review of national environmental and social regulations that apply to the client’s/investee’s operations;
  • Review of the client’s/investee’s track record on environmental and social issues, in terms of potential non-compliance with national regulations or negative publicity;
  • Review of the client’s/investee’s performance against international standards or industry best practice regarding environmental and social issues; and
  • Review of the client’s/investee’s actions (if any) to mitigate potential environmental and social issues associated with operations.

The financial institution should document all findings from the due diligence, which will be considered during the decision-making process before proceeding with a transaction. In the event that environmental and social issues are identified and should be mitigated through corrective actions, the financial institution can stipulate these in the legal agreement with the client/investee and monitor on-going progress toward completion.

For transactions that have been categorized as high risk, the financial institution may require the services of an external expert/consultant to conduct the environmental and social due diligence. To do so effectively, it is critical that the financial institution communicates to the external expert/consultant the environmental and social requirements that clients/investees are required to comply with.

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