All FIs should have an E&S policy that:
- Clearly articulates the FI’s principles and values from an E&S perspective and conveys the FI’s strategy, ambitions and business culture with regard to managing E&S risks, impacts and opportunities. Recognition of how the FI will integrate climate change risks and issues (including transition risks) are likely to become an increasingly important aspect of Policy setting and framing.
- States its scope of application.
- Establishes the ESMS framework, including a reference to the E&S standards the FI will meet (e.g. adherence to the Equator Principles) and the standards it expects its clients to meet (e.g. local regulations, International Labour Organization (ILO) Core Labour Conventions, International Finance Corporation (IFC) Performance Standards, where applicable).
- States the FI’s commitment to E&S risk management and how it intends to operationalise such commitments in practice.
- Includes or refers to a list of the activities in which the FI will not invest (the FI’s ‘Exclusion List’).
- Highlights the FI’s intentions with respect to identifying and realising business opportunities relating to selected E&S themes (e.g. climate change, gender) refer to the Value-Add Section for guidance on developing E&S strategies in key E&S theme areas).
- Specifies who will be accountable and responsible for the implementation of the policy.
- Meets the E&S requirements as set out by investors in the relevant legal agreements.
- Is communicated and available to all the FI board members, staff, clients, current and prospective investors and other stakeholders, as appropriate.
- Is approved by a representative of the senior management team and dated.
- States that the ESMS will be regularly reviewed to ensure its fit for purpose.
- Refers to other policies containing E&S commitments that need to be applied by the organisation and read in conjunction with the E&S policy (e.g. Climate Change or gender/ women’s economic empowerment commitments and policies).
2. Guidance and advice
- Developing the policy
The effectiveness of the E&S policy will depend on, inter alia, whether the FI properly considered the types and significance of the E&S issues it may be exposed to, its leverage in different types of transactions, its own market positioning and strategy, its specific circumstances, and the internal resources available to develop and implement E&S policies and procedures. It is also important to consider emerging regulatory requirements (including those that are emerging from central banks), global trends, investors’ priorities and expectations, and align the direction of the policy and practices with those of key stakeholders.
- Elements of a good policy
Good policies typically contain or address the following:
- A summary of the FI’s commitments and stance on E&S matters, responsible lending and operations. This explains briefly how the FI’s values and practices are aligned with, and contribute to, the organisation’s overall mission and objectives, as well as its approach to addressing challenges.
- A brief statement about the scope and applicability of the policy (e.g. define whether the policy applies to all the FI’s clients, services and facilities). It is important to set boundaries in terms of when the E&S policy will come into effect and if any of the FI’s services and products will be excluded from the requirements set in the E&S policy. It is customary for such requirements to be applied to all new transactions (after the date of publication of the E&S policy) or at the time of renewal for existing credit lines.
- A clear statement regarding the sectors and activities the FI will not finance/invest in (‘Exclusion List’).
- A clear statement regarding E&S norms and standards that the FI will follow and to which it will hold its clients. This will often be structured as a hierarchy whereby certain requirements will apply to all clients and others will be applicable to certain clients or types of transactions. For example: a list of excluded activities and the requirement to comply with local law will apply to all the transactions but other standards/requirements (e.g. IFC Performance Standards) may only apply to transactions with higher E&S risks.
- A commitment to work realistically and pragmatically towards the application of these standards over time and a description of how the FI intends to achieve this goal despite the challenges it may face.
- A reference to internationally recognised initiatives, principles or standards that the FI has adopted or committed to follow (e.g. UNEP FI Principles for Responsible Banking, 2X Challenge, Task Force on Climate-related Financial Disclosures (TCFD) etc.).
- A summary of how the policy will be applied and how progress will be reported and, as applicable, evaluated.
- The policy should be clear and understandable.
- The policy should be signed by top-level management (to demonstrate the FI’s commitment) and dated. The policy (and the rest of the ESMS) should be communicated to the FI’s board and staff and revisited with appropriate regularity to ensure it remains relevant and up to date. There should be a process for revising the policy and other components of the ESMS. Changes to the ESMS may need sign-off by investors.
- Communicating the policy
The policy document should be visible, adequately communicated and explained to the entire FI’s workforce (including senior management) and should be easily accessible and made prominent (e.g. published on the FI’s intranet, in the investor zone of its website and ideally disclosed publicly online).
Consideration should also be given to whether and how the policy is communicated externally and who are the FI’s key stakeholders. It is also important to consider who might be interested in the policy – potential future and existing clients, as well as investors and other third parties affected by potential credit lines and other products – and then make the policy easily accessible to them. The FI shall consider any legal requirements the FI may be subject to. A well-conceived policy and ESMS will signal E&S commitment to stakeholders, including regulators, investors and clients.