Risk management framework
FMO uses a comprehensive risk management framework that reflects its banking license, state guarantee, and mandate to do business in high-risk countries. The Management Board keeps regular oversight of risk management processes, and risk-based authorities delegated to risk departments. The risk-based roles and responsibilities are organized in adherence to the “three lines of defence” principle, with the role of the first line of defence (e.g. Investment departments) being balanced by the second line of defence (Risk Management), and the third line (Internal Audit) to perform independent assessments as to whether processes are sufficiently controlled.
FMO has a Risk Appetite Framework in place, which is updated annually and approved by the Management Board and the Supervisory Board. Adherence to this framework and existing risk limits is continuously managed by dedicated committees.
FMO also applies a conservative capital management framework. The only risks that FMO actively pursues are credit risk and equity risk resulting from loans to and investments in private institutions in emerging markets. Other risks cannot always be avoided, but FMO mitigates these risks as much as possible. FMO’s largest investment and ESG risks are embedded in its emerging market debt and equity portfolios. To allow for this, FMO ensures diversification of investment risk in its portfolios through risk limits per country, region, sector, single and group exposures.
In addition, FMO has developed a set of investment criteria that set minimum requirements for acceptance of investment and ESG risks. These requirements are guided by various standards, among them are the IFC Performance Standards, OECD Guidelines and the UN Guiding Principles on Business and Human Rights. If an investment entails a severely increased risk, the project is transferred to the Special Operations team for a strict monitoring scheme and restructuring possibilities.
Finally, FMO has a compliance framework to ensure compliance with laws and regulations on integrity as well as with FMO’s ethical standards. This compliance framework entails identifying integrity risks, designing policies, monitoring, training and providing ad-hoc advice. FMO has also designed Compliance Risk Indicators that are reported to, and steered on, by the management.