Environmental and Social Risk Management Implementation Manual (2022)

Operationalising environmental and social risk management across Pakistan’s banks and development finance institutions.

Pakistan’s acute exposure to climate change — brought into stark relief by the catastrophic floods of 2022 — has sharpened the recognition that environmental and social fragility translates directly into financial risk. While the State Bank of Pakistan’s (SBP) 2017 Green Banking Guidelines articulated the expectation that banks integrate such considerations into their conduct, they stopped short of furnishing the methodological infrastructure to do so consistently.

To close that gap, in November 2022 the SBP issued the Environmental and Social Risk Management (ESRM) Implementation Manual, a procedural instrument designed to standardise and accelerate the risk-management dimension of the Green Banking Guidelines across the financial sector.

The ESRM Manual provides banks and DFIs with a structured framework to identify, assess, manage, monitor, and report environmental and social risks associated with financing activities.

The Manual equips banks and development finance institutions (DFIs) with a comprehensive Environmental & Social Management System (ESMS), a quantitative risk-rating methodology, due-diligence and supervision checklists, and a standardised reporting template through which institutions report their progress to the regulator.

Crucially, it broadens the lens beyond environmental exposure to encompass social and climatic risks — including labour standards, community health and safety, and the physical hazards of a warming climate — anchoring Pakistani practice to internationally recognised benchmarks such as the IFC Performance Standards and the Equator Principles.

The IFC’s Role

The Manual was developed with the sustained technical support of the International Finance Corporation (IFC) under its Pakistan Sustainable Banking Project, building on the SBP’s 2015 accession to the IFC’s Sustainable Banking and Finance Network.

The IFC supplied the tools, checklists, and benchmarking aligned to the SBFN Measurement Framework and supported a programme of train-the-trainer sessions to build institutional capacity.

The Manual was launched at a national Sustainable Banking Conference in November 2022, chaired by the SBP Governor and attended by the CEOs of the country’s banks alongside senior IFC representatives.

What the Manual Requires of Financial Institutions

• Establish a formal Environmental & Social Management System (ESMS) embedded within the institution.
• Screen and categorise every transaction against a quantitative E&S risk-rating system.
• Conduct Environmental & Social Due Diligence (ESDD) using prescribed checklists before financing approval.
• Apply an exclusion list for activities prohibited on environmental or social grounds.
• Address social and climatic risks explicitly, including labour standards and community impacts.
• Monitor E&S compliance throughout the life of each financing arrangement.
• Report implementation progress annually to the SBP through the Green Banking Monitoring & Evaluation framework.