Objectives and overview

Integrating E&S into the credit approvals process 

The objective at this stage is to enable the FI’s Credit Committee (CC), or the relevant decision body, to make an informed decision on a new transaction that takes E&S factors into account. For the purposes of this Toolkit, the reader shall consider the CC as the approving body for transactions. The name and composition of such bodies vary across FIs and may also vary depending on the type of transaction and/or the facility size.

Additionally, FIs may need to involve other committees not directly linked to credit/transaction approval, but which may need to approve or be consulted prior to final approval. These committees may include risk, reputational, E&S and other types of committees which are increasingly getting involved in the approval and/or monitoring of certain types of transactions and the overall FI’s portfolio E&S performance.

The CC needs adequate information to understand the E&S risks, impacts and, as applicable, opportunities associated to a transaction. This is generally done via an E&S summary/memo in the transaction application, although the CC may also request a copy of the Action Plan (and rarely some additional information). The level of information and detail is generally linked to the materiality of the E&S risks and impacts of a transaction. High risk transactions would generally need a more detailed E&S memo/E&S section in the credit application than medium and low risk transactions.

The transaction application should provide a summary of E&S DD findings and further details are included below.

An overview of the activities undertaken during the application and approval stage is shown in the graphic illustration below.

Click to view diagram


2.1 Provide input for the transaction approvals process

The summary of E&S inputs to be discussed at the CC should be prepared or signed off by the relevant team which may vary depending on the level of E&S risks and impacts. For example, some FIs require the E&S Coordinator sign off prior to submitting any credit application for transactions with medium to high E&S risks and impacts.

CC members should be given access to relevant DD documents on request, in addition to the E&S summary in the supporting credit documentation.

  • Elements of a good E&S summary for the CC
    A good E&S summary would typically include the following information:

    • E&S inherent risk rating assigned to the deal with a clear justification;
    • A brief summary of the DD process including any shortcomings or limitations;
    • DD conclusions, highlighting the materiality of key E&S factors, including those related to the client’s commitment, capacity, and track record (CCTR), and gaps against applicable standards and potential opportunities;
    • Main actions to be implemented to address identified risks/gaps and to materialise opportunities (full Action Plan may be provided); and
    • Summary of how the FI intends to influence and monitor E&S matters throughout the credit lifecycle.

2.2 Make a decision on the transaction application

The CC should consider E&S DD findings in the context of the deal as a whole and use it to validate or question the information from other DD work streams (e.g. financial and legal DDs). The following questions (which are the same ones that guide the DD process) can help the CC to arrive at an appropriate decision.

  • Possible questions/discussion points at CC
    Discussion points at the CC meeting may include:

    • Materiality of E&S risks to the client business and how this can affect the client and the FI, i.e. are they financially or otherwise significant and could they be avoided or mitigated?
    • Does the client comply with applicable laws, regulations, and international standards and guidelines on key E&S factors laid out in the FI’s ESMS requirements?
    • Is the client’s management system sufficiently well developed and implemented to successfully manage E&S factors, or does it need to be improved?
    • Does the company’s CCTR on addressing E&S matters indicate its willingness and ability to undertake any necessary improvements?
    • Is an Action Plan required? Where there are gaps, how can these be addressed and what resources will be required?
    • How do the proposed E&S improvements fit with the client’s business plan and the FI’s view of the client’s likely future profitability (improvements may require capital/staff time and generate future efficiency or revenue benefits)?
    • Were there any limitations to the DD and any resulting potential unquantifiable risks?
    • How does the FI intend to maintain influence and oversight on E&S matters going forward?
    • Are there potential reputational risks to the FI and investors?
    • Does the transaction significantly affect the FI’s portfolio composition in a way in which it may significantly increase portfolio E&S/reputational risks and/or the FI’s ability to deliver its E&S commitments (e.g. commitment regarding climate change)?

  • The CC meeting: Integrating E&S factors into the credit approvals process

    Good practice in considering E&S matters at the CC should include the below:

    • A member of the CC should have responsibility for ensuring that E&S factors are adequately discussed, and a clear conclusion is reached.
    • As appropriate (e.g. for high risk transactions), the E&S Officer(s) should attend the CC meeting to answer questions directly. If the E&S Officer does not attend, then the CC member with responsibility for directing consideration of E&S matters should be able to ask the E&S Officer(s) questions before the meeting and share the E&S Officer(s’) views.


  • Key outputs of the application and structuring stage

    • The CC minutes including E&S matters discussed and any related decisions made.
    • As good practice, if legal negotiations between the FI and client materially fail to achieve the desired outcome as described by the credit documentation or requested by the CC, the credit team should revert to the CC with the client’s counter proposal.
    • Where the CC has granted conditional approval, ensure that conditions or outstanding actions and/or documentation have been completed/attained and reviewed prior to the transaction execution.

    Assuming the credit application is approved, the FI will use the DD record and CC meeting minutes during credit documentation preparation and monitoring.