Generally, the environmental and social issues of small and medium enterprises are not closely monitored and the risks will vary depending on company size and its capacity to manage environmental and social risks, as well as by industry sector, and location.
The procedures and tools for conducting environmental and social due diligence for this type of 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 client/investee’s compliance with national environmental and social regulations; 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 that 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.
