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A leasing company’s exposure to environmental and social risks will vary for finance leases or operating leases and will be more significant for transactions involving specialized equipment and machinery for use in certain industry sectors such as forestry operations, mining, and oil and gas.

The leasing company will apply the environmental and social risk management procedures to each transaction as part of its overall risk management framework. A leasing company’s ESMS will include the following components:

  • Environmental and social policy. The policy will state the leasing company’s commitment to managing environmental and social risks to which it might be exposed to as a result of transactions and clients in its portfolio. Typically, this will include a commitment not to finance clients conducting certain types of activities and requirements for clients to comply with environmental and social regulations.
  • Transaction screening. The leasing company will screen all transactions to determine if it will proceed with a given transaction.
  • Environmental and social due diligence. The leasing company will conduct a environmental and social due diligence for each transaction. For most transactions involving office equipment, the extent of the environmental and social assessment will be limited to a simple review of the client’s operations to confirm that financing will be used for its intended purpose. For transactions involving vehicles, specialized equipment and machinery, and properties, the environmental and social assessment will need to include an overview of the client’s operations, which may require a site visit, to identify potential environmental and social impacts due to the client’s industry sector. Environmental and social impacts of this scale are typically regulated under a country’s environmental and social regulatory framework and the leasing company will need to satisfy itself that the client’s use of the leased asset complies with all applicable regulatory requirements. This may require a site visit by the leasing institution.
  • Corrective action plan. Based on the findings of the environmental and social due diligence or during subsequent monitoring of the client’s performance, the leasing company may require clients to implement certain mitigation measures within a specified timeframe.
  • Environmental and social covenants. The leasing company will incorporate the corrective action plan, if necessary, and other standard environmental and social requirements as clauses in the legal agreement with the client.
  • Monitoring environmental and social performance. The leasing company will monitor the compliance of clients with its environmental and social requirements to ensure that leased assets are used for intended purposes and operated and maintained properly. The scope of monitoring will depend on the transaction and the client’s operations and can include periodic site visits.

For a leasing company, decision-making may be centralized or delegated at the branch level depending on the transaction size. The ESMS will need to define the roles and responsibilities of staff involved at each stage of the decision-making process and will typically include an ESMS Officer with oversight of the ESMS and in some cases also an ESMS Coordinator for the day-to-day implementation of the Environmental and Social Management System. Loan Officers will typically request from the client the necessary environmental and social information, which will be reviewed by Credit Analysts. The environmental and social findings and recommendations will be considered by the Credit Committee during the decision-making process for proceeding with a transaction.

A leasing company will need to ensure that a system is in place for record-keeping on environmental and social issues associated with each transaction. This can be integrated with a leasing company’s existing system and will need to be accessible by all branch offices.

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