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A microfinance institution’s exposure to environmental and social risks is typically low, requiring in most cases environmental and social risk management procedures to screen transactions only. These will be applied as part of the microfinance institution’s overall risk management framework for each transaction. A microfinance institution’s Environmental and Social Management System will include the following components:

  • Environmental and social policy. The policy will state the microfinance institution’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 certain types of activities that clients might be involved with.
  • Transaction screening. The microfinance institution will screen all transactions to determine if it will proceed with a given transaction.
  • Environmental and social due diligence. The microfinance institution may conduct a environmental and social due diligence for certain transactions with clients whose operations are within industry sectors that may have potential environmental and social risks associated with them. This will generally be limited to a simple overview of the client’s operations, which may require a site visit to identify potential environmental and social issues associated with the client’s industry sector.
  • Corrective action plan. In some cases based on the findings of the environmental and social due diligence or during subsequent monitoring of the client’s performance, the microfinance institution may require a client to implement certain mitigation measures within a specified timeframe.
  • Environmental and social covenants. The microfinance institution may incorporate standard environmental and social requirements as clauses in the legal agreement with the client.
  • Monitoring environmental and social performance. The microfinance institution will monitor the compliance of clients with its environmental and social requirements, which may require periodic site visits.

For a microfinance institution, 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 its day-to-day implementation. Loan Officers will typically screen all transactions and conduct additional environmental and social due diligence if necessary. The environmental and social findings and recommendations can be considered by the Credit Committee during the decision-making process for proceeding with a transaction.

A microfinance institution 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 microfinance institution’s existing system and will need to be accessible by all branch offices.

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