Environmental and social standards establish criteria for the financial institution in terms of activities that it will not finance and also establish requirements for clients/investees to comply with, such as national environmental and social regulations and international standards.
In general, environmental and social standards can include:
- Exclusion List: A financial institution can develop a list of excluded activities that it will not finance because of environmental and social implications or other concerns of the organization or its shareholders. In some cases, excluded activities are specified in national laws or regulated under international agreements, international bans and international best practices. Excluded activities may also be specified in the terms of an agreement with an international development finance institution.
- Environmental and Social Regulations: The activities of any client/investee are subject to the environmental and social regulatory framework of the country in which the activities are being conducted. The financial institution needs to be familiar with the national environmental and social regulations that clients/investees are required to comply with as well as the requirements, if any, of the international conventions, agreements and international bans of which a country might be a signatory.
- International Standards: The activities of a client/investee may also be subject to the requirements of international standards established by international development finance institutions as specified in the terms of an agreement with the international development finance institution. The activities of a client/investee may also be subject to the sustainability standards established under internationally recognized industry certifications.
Providing financing to a client/investee whose activities fall on the exclusion list or whose activities do not comply with applicable national environmental and social laws and international standards presents a potential risk to the financial institution. The financial institution should verify as part of its environmental and social due diligence process that the activities of a client/investee are not on the exclusion list and comply with applicable national environmental and social laws and international standards.
