What is an ESMS?
The ESMS meaning is environmental and social management system: a management system for environmental, health and safety, labour and community risks. It turns a company's environmental and social commitments into routines that people actually follow.
The IFC's ESMS Implementation Handbook describes a management system as a set of processes and practices to consistently implement a company's policies to meet its business objectives. An ESMS applies that idea to environmental and social risks and impacts, and is built around the plan-do-check-act cycle: set the policy, put it into practice, check how it is working, and improve.
An ESMS is not a single document. It is how the business runs, and it should grow with the business: a small company needs a simpler system than a large manufacturer, but both need the same basic parts.
What are the nine elements of an ESMS?
The IFC handbook sets out nine elements of an effective ESMS. Each one helps a company assess, control and keep improving its environmental and social performance.
| Element | What it means in practice |
|---|---|
| 1. Policy | A written statement of the company's environmental and social commitments, backed by senior management |
| 2. Identification of risks and impacts | Working out which environmental, health and safety, labour and community risks the business creates or faces |
| 3. Management programmes | Action plans and procedures to prevent or correct those risks |
| 4. Organisational capacity and competency | Named roles, responsibilities and authority, with training and communication |
| 5. Emergency preparedness and response | Plans for accidents, fires, floods and other emergencies |
| 6. Stakeholder engagement | Identifying and engaging the people affected by the business |
| 7. External communications and grievance mechanisms | A channel for outsiders to raise concerns, and a way to respond to them |
| 8. Ongoing reporting to affected communities | Keeping affected communities informed over time |
| 9. Monitoring and review | Indicators, monitoring and management review to measure and improve the system |
Source: IFC ESMS Implementation Handbook, version 2.1, November 2015 (PDF). The IFC also publishes an ESMS toolkit and a self-assessment guide to go with the handbook.
What is an ESMS in banking?
In banking, an ESMS is a bank's own system for managing the environmental and social risks of the businesses and projects it finances. It decides which loans need closer review, what borrowers must show, and how the bank monitors them.
Nigerian banks committed to this in 2012. The first of the Nigerian Sustainable Banking Principles, adopted by the Bankers' Committee and implemented under the Central Bank of Nigeria's direction, covers environmental and social risk management in banks' business activities. A bank applying it may ask a borrower about its environmental and social risks, and about the systems it uses to manage them.
For larger project finance, many banks also apply the Equator Principles. Bank of Africa, for example, adopted them in 2010 and applies them when financing investments above USD 10 million, based on the eight IFC Performance Standards and the World Bank Group's environmental, health and safety guidelines.
What are the IFC Performance Standards?
They are eight standards that set out how IFC clients must manage environmental and social risks over the life of an investment. Performance Standard 1, on the assessment and management of environmental and social risks and impacts, is where the requirement for an ESMS sits.
The IFC Performance Standards (PDF) took effect on 1 January 2012. They cover risk management, labour and working conditions, resource efficiency and pollution prevention, community health and safety, land acquisition, biodiversity, indigenous peoples and cultural heritage. The document notes that other financial institutions may also apply them, which is why their influence reaches well beyond IFC's own clients.
Why do investors and development institutions ask for an ESMS?
Because it shows a business can manage the risks that would otherwise become their risks. An investor or development institution funding a company takes on part of its environmental, labour and community exposure, and an ESMS is the evidence that the exposure is managed.
It also pays for the business itself. The IFC handbook points to lower production costs from using energy and materials more efficiently, lower waste disposal costs, and fewer labour problems through clear human resources and health and safety procedures. It also notes that companies at the earliest stage of maturity tend to be guided by external experts, customers and investors rather than by their own system.
How is an ESMS different from an EMS, an EIA and ESG reporting?
An ESMS manages environmental and social risks on an ongoing basis. An environmental management system covers the environment only, an environmental impact assessment looks at a specific project before it goes ahead, and ESG reporting discloses information to investors.
Environmental management system (EMS)
An EMS, such as one certified to ISO 14001, manages environmental aspects only. An ESMS adds labour, health and safety and community issues. A company with an EMS already has part of the structure an ESMS needs.
Environmental and social impact assessment
An impact assessment studies a particular project's likely effects before approval. In Nigeria, environmental impact assessments and audits sit with the regulators; see our guide to NESREA. An ESMS is what manages those risks once the business is running.
ESG and sustainability reporting
Reporting under IFRS S1 and S2 discloses material sustainability information to investors and lenders, and is mandatory for Nigerian public interest entities from 2028. An ESMS produces much of the governance, risk and monitoring information a disclosure draws on. See what sustainability reporting is.
How does a business build an ESMS?
Start with the first two elements: a policy senior management signs, and an honest list of the risks your operations create. The rest of the system, from action plans to grievance mechanisms and monitoring, is built around those two.
The IFC handbook gives step-by-step instructions for each element, including how to set roles, responsibilities and authority for running the system. Three practical points from our side: name the people responsible rather than a committee; keep the system in proportion to the size of the business; and review it regularly, because an ESMS that is never checked stops working. A grievance mechanism, in particular, only works if the people it is meant for know it exists.
Where does Emvert fit?
Emvert does not provide an ESMS and does not screen or rate environmental and social risk. What it does is support the monitoring and evidence side of the work: measuring emissions, attaching source documents to every figure, assigning owners, and showing a company's readiness for sustainability reporting.
For institutions that support, fund or oversee many businesses, Emvert for Institutions shows each portfolio company's readiness, carbon accounting and reporting status, and lets you group and categorise companies across a programme or fund. It complements an ESMS; it does not replace one.
Talk to us about portfolio monitoring for your programme, fund or lending book.
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These are the primary documents this guide is based on.