Across the financial sector, expectations around sustainability are shifting rapidly. Banks, savings and credit co-operative societies (SACCOS) , and microfinance institutions are increasingly being asked to demonstrate clear Environmental, Social, and Governance (ESG) commitments. For many, this is driven by the demands of investors, lenders, and regulators who want to see responsible business practices embedded into strategy and operations. Yet for most institutions, ESG policy development is still relatively new territory. While the pressure to “have a policy” is growing, many have little guidance on how to create one that genuinely reflects their business context. The result is often a borrowed or generic document that looks acceptable on paper but offers little practical value. 

This guide sets out practical steps to help financial institutions develop ESG policies that are credible, relevant, and implementable—policies that respond to both compliance requirements and operational realities.

Step 1: Begin with Discovery (Know Your Context)

Before drafting any ESG policy, it is important to understand your institution’s unique realities. This involves clarifying your objectives for the policy, examining your business model, and mapping where and how you operate. It also means assessing the sectors you finance (eg. Agriculture, real estate, manufacturing, etc) to understand where the biggest ESG risks lie, and being aware of any regulatory requirements from both local and international sources. Without this foundation, any policy risks being generic and disconnected from the realities of your institution’s operations.

Step 2: Engage Stakeholders Early

It can be tempting to jump straight into drafting, but engaging stakeholders at the outset ensures the policy reflects both operational realities and external expectations. This does not require expensive or prolonged consultations. In is about targeted, focused conversations with the right people. 

Stakeholders may include: 

• Internal: Board members, senior management, credit and risk teams, compliance officers, loan officers, operational staff, human resources, internal audit. 
• External: Regulators, investors, key clients, suppliers, community representatives, civil society groups, and industry associations. 

From them, you should gather: 

• From internal stakeholders: Insights into operational realities, existing risk controls, gaps in current processes, and opportunities to embed ESG into decision-making. 
• From external stakeholders: Expectations for ESG performance, potential environmental or social concerns, sector-specific risks, and opportunities for partnerships. 

This engagement is worthwhile because it prevents blind spots by revealing risks that policy teams may not see but frontline staff and external parties encounter; it builds credibility with funders who expect ESG commitments to reflect real operational conditions; it saves time later by reducing revisions and resistance during implementation; and it encourages ownership, as people are more likely to follow a policy they helped shape. A few well-placed conversations now can prevent months of fixing an impractical policy later.

Step 3: Conduct a Materiality Assessment

Materiality means identifying the ESG issues that matter most to your institution and its stakeholders. For a financial institution, these could include: 

• Environmental: Climate risk in loan portfolios, financing of high-emission industries, waste management in operations. 
• Social: Financial inclusion, customer protection, labour practices, community impacts of financed projects. 
• Governance: Board diversity, anti-corruption measures, responsible lending practices, transparency in disclosures. 

The aim is to focus on areas with the greatest impact on your operations, reputation, and long-term sustainability. This step ensures your policy addresses the right priorities rather than attempting to cover every possible ESG topic.

Step 4: Align with Standards and Best Practices

While your policy should be tailored to your institution, aligning it with recognised ESG frameworks increases its credibility with investors, regulators, and other stakeholders. Key frameworks to consider:

• IFC Performance Standards – A benchmark for environmental and social risk management in line with international good practice. more on IFC Performance Standards
• United Nations Principles for Responsible Banking or Investment (PRI) – Guidance for integrating sustainability into organisational strategy. more on United Nations Principles for Responsible Banking
• Sustainable Development Goals (SDGs) – Linking your ESG commitments to global development priorities. 
• IFRS Sustainability Disclosure Standards (ISSB) – In 2021, the IFRS Foundation created the International Sustainability Standards Board (ISSB) to consolidate major frameworks such as the SASB Standards and the Integrated Reporting Framework. Its first two standards, IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), build on SASB’s industry-specific approach and the Task Force on Climate-related Financial Disclosures (TCFD) framework. more on IFRS Sustainability Disclosure Standards
• Global Reporting Initiative (GRI) Standards – Remain independent and widely used for impact-focused reporting, complementing ISSB standards for a fuller picture of both financial materiality and broader sustainability impacts. Your choice of framework should reflect your institution’s size, market, and stakeholder expectations. more on Global Reporting Initiative Standards

Step 5: Draft the Policy 

An ESG policy should be concise, practical, and reflective of your institution’s operations. At a high level, it will set out your institution’s commitment to ESG, outline how relevant risks are identified and managed, describe the governance structures that ensure oversight, and explain how performance will be monitored and reported. The exact design, tone, and level of detail will vary depending on your size, business model, and regulatory environment. What matters most is that the policy is actionable and credible, not generic. Developing such a policy is a process that benefits from professional guidance to ensure it stands up to scrutiny and works in practice.

Step 6: Integrate into Operations

A well-written policy is only valuable if it is lived out in day-to-day decisions. This means weaving ESG considerations into lending approvals, investment choices, procurement processes, and even staff performance evaluations. Internal audits, training programmes, and management reviews should all reinforce the ESG commitments stated in the policy.

Step 7: Monitor, Report, and Improve

ESG is dynamic, with regulations, market trends, and stakeholder expectations constantly evolving. Institutions should set measurable targets, track progress, and provide regular updates to stakeholders. This could be in the form of annual ESG reports or integrated disclosures in financial statements. Periodic reviews will ensure the policy remains current and continues to reflect best practice.

In conclusion, an ESG policy should not be treated as a mere formality to tick off an investor checklist. When thoughtfully developed, it becomes a practical tool that shapes decision-making, safeguards reputation, and positions a financial institution for long-term success. The principles outlined here provide a clear starting point, but the real strength of an ESG policy lies in how well it reflects an institution’s realities, priorities, and growth ambitions. That requires more than a template. It calls for a process that balances compliance with practicality and vision.