Environmental risks pertain to the potential for damage of the environment and ecosystem. The principal sources of such potential damage are pollution of the air, water and land resulting from industrial activity. Environmental risks are largely a function of the nature (i.e., sector) of the business activity. Social risks pertain to the potential of business activities to cause an adverse impact such as damage, injury or loss to persons (e.g., employees, customers) and communities (e.g., neighbors). Social risks can include violation of labor standards, unsafe working conditions, community impacts such as public health, safety and security, discrimination, impacts on indigenous peoples and cultural heritage, or involuntary resettlement. Social risks are largely a function of the client’s behavior (Please see Annex 1 for details on typical E&S risks to which that a B/FI’s clients are exposed).
To reduce exposure to Environmental and Social (E&S) risks associated with their clients, B/FIs must ensure that their clients’ financial and operational sustainability is not undermined by adverse impacts on the environment or communities resulting from their clients’ business activities. B/FIs require a good understanding and evaluation of the E&S risks associated with a potential client’s operations, and their implications to the client and the B/FIs, prior to making a financing decision.
This requires proactive identification, assessment, and management of E&S risks before they become significant or result in an adverse outcome for the client. A B/FI can best achieve this by developing and implementing an Environmental and Social Management System, to systematically assess the E&S risks arising from their clients’ operations and manage its exposure to those risks.
