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To start the process of developing a ESMS, the ESMS Working Group should analyze the financial institution’s portfolio to gain an understanding of the financial institution’s exposure to environmental and social risk, including the industry sectors of clients/investees and transaction type.

The ESMS Working Group should then review the financial institution’s existing procedures for assessing environmental and social risk to determine if these are adequate for managing the identified level of environmental and social risk. In particular, the ESMS Working Group should review existing procedures for screening transactions, categorizing transactions based on their environmental and social risk, conducting environmental and social due diligence and monitoring the client’s/investee’s environmental and social performance. The ESMS Working Group should also review the process for formally documenting each transaction’s environmental and social risk, considering environmental and social findings in the decision-making process, and incorporating environmental and social requirements as covenants in legal agreements.

The ESMS Working Group should then identify any potential gaps to determine what additional procedures need to be developed and/or revised to ensure that the ESMS will meet the needs of the financial institution. Next, the ESMS Working Group should develop the structure of the ESMS such that procedures for environmental and social risk assessment are incorporated into the financial institution’s existing risk management framework. This will also require a revision of existing forms or the development of new forms and tools, which are used as part of the financial institution’s risk management framework. These typically include loan applications, risk appraisal forms, due diligence report templates, site visit checklists, transaction monitoring forms, legal agreements and external reporting templates. The ESMS Working Group should share internally early drafts of the procedures and forms to obtain feedback from staff to ensure that the proposed enhancements to the risk management framework are practical and can be implemented.

Finally, the ESMS Working Group should compile the policy and all the procedures for managing environmental and social risk into an operational manual to formally document the financial institution’s ESMS. Once the ESMS and the supporting material have been developed in detail, the ESMS Working Group should present it to the financial institution’s Senior Management for formal approval and to request the necessary resources for implementation. The ESMS Working Group can then develop an implementation plan to institutionalize and roll out the Environmental and Social Management System across the financial institution, which should include training of all staff that will be involved in E&S risk screening and management.

If needed, the ESMS Working Group can hire an external consultant to help the financial institution throughout the process of developing and implementing the ESMS.


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