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A Environmental and Social Management System states a financial institution’s commitment to environmental and social management, explains its procedures for identifying, assessing and managing environmental and social risk of financial transactions, defines the decision-making process, describes the roles, responsibilities and capacity needs of staff for doing so and states the documentation and recordkeeping requirements. It also provides guidance on how to screen transactions, categorize transactions based on their environmental and social risk, conduct environmental and social due diligence and monitor the client’s/investee’s environmental and social performance.

Outcome of E&S Risk Management
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The scope of financing activities of different types of financial institutions varies greatly, and so do the associated environmental and social risks. The management of these risks should also be tailored to the individual institutional characteristics of each financial institution, which are different for banking institutions, leasing companies, microfinance institutions, and private equity funds.

The supporting policies and procedures of the ESMS should be well documented, made available to all staff with responsibilities for implementation and can be compiled into a stand-alone operations manual to formally document the process. This manual should be updated regularly through a simple but effective revision process.

Because the procedures and decision-making process of the ESMS are systematically incorporated at each stage of transaction appraisal and monitoring, the ESMS cannot function as a stand-alone system. The process for developing a ESMS needs to consider a financial institution’s existing risk management framework and transaction cycle.

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