Environmental, social and governance standards
Environmental, social and governance standards are an integral part of FMO’s investment process. These standards serve several purposes. First, they help reduce the risk to the environment, employees and workers, communities and other stakeholders. Second, they help our clients to contribute positively to the SDGs. Third, they reduce risks to our clients and thereby to FMO.
Good corporate governance (CG) breeds trust between management, investors, employees, and other stakeholders through accountability, transparency and fairness. Poor governance increases risk and many of FMO’s non-performing loans and special operations cases are rooted in weak governance. Improving governance therefore not only adds value to clients, it also helps us increase the performance of our portfolio. It further protects the reputation of FMO from issues such as corruption, which is common in some of our countries.
FMO’s ESG standards are anchored in our Sustainability Policy. This Policy guides our contribution to sustainable development with respect to both development impact and ESG. This is further supplemented by our position statements on topics such as human rights, land governance and coal. FMO expects clients to work towards our ESG requirements, which are based on the IFC Performance Standards, the World Bank Group Environmental, Health & Safety Guidelines and the G20/OECD Principles of Corporate Governance. IFC Performance Standards cover Assessment and Management of Environmental and Social Risks and Impacts, Labor and Working Conditions, Resource Efficiency and Pollution Prevention, Community Health, Safety and Security, Land Acquisition and Involuntary Resettlement, Biodiversity Conservation and Sustainable Management of Living Natural Resources, Indigenous Peoples, and Cultural Heritage.
These standards are championed by a team of 32 environmental, social and corporate governance specialists, who are embedded in our investment teams and are involved in individual transactions. FMO’s investment teams ensure that financing proposals submitted to FMO’s Investment Committee have undergone due diligence and include information on environmental, social (including human rights) and governance risks, impact and any required mitigation measures. This may include an action plan (ESAP) for clients that need to improve their ESG performance. Independent scrutiny, challenge and advice is provided by FMO’s Credit Department. In 2019, FMO made several changes to its corporate governance structure to further embed ESG into its core business. We added an Impact and ESG (IESG) Director to our leadership team to oversee our current team of IESG specialists. The IESG director has a seat on the Executive Committee, FMO’s highest decision-making body. The Supervisory Board also introduced an Impact Committee to ensure ESG is closely integrated in the operations and the strategy of FMO.
As FMO has grown, stakeholder interest in our activities has increased. That is why we regularly participate in public forums and engage with critics, with whom we discuss our ESG ambitions and dilemmas. We also work closely with other DFIs to ensure our approaches are harmonized. In 2019, for example, we were part of an EDFI initiative to harmonize our E&S standards for financial institutions. More harmonization creates a level-playing field, helps to create greater impact and leads to efficiencies among clients working with multiple DFIs.
Human rights approach
FMO acknowledges it has the responsibility to respect human rights. Respecting human rights is fundamental to a peaceful, just and inclusive society. But while human rights are enshrined in various laws, businesses can undermine these rights through their action or inaction, especially in countries where baseline environmental and social conditions are less favorable. Poor health and safety practices can violate workers’ right to a safe workplace, for example, while pollution can undermine a community’s right to an adequate standard of living. At the same time, businesses have the power to strengthen human rights, for example by providing good-quality jobs or encouraging gender equality in societies or sectors where this is not common practice.
Human rights forms an integral part of our ESG approach. We have adopted the IFC Performance Standards as our operating standard and are further guided, among others, by the United Nations Guiding Principles for Business and Human Rights (UNGPs), the OECD Guidelines on Multinational Enterprises and the International Labor Organization Declaration on Fundamental Principles and Rights at Work. We also participated in the Dutch Banking Sector Agreement on international responsible business conduct regarding human rights, which focused on the implementation of the OECD Guidelines for Multinational Enterprises and the UNGPs. This Covenant ended in December 2019. FMO remains committed to continuously improve implementation of its standards and is currently exploring – with former Covenant parties – how to continue collaborating on this topic.
In recent years, FMO has strengthened the human rights lens in due diligence throughout our investment process. In 2019, we introduced further guidance on performing contextual risk analysis with a human rights lens and extended it to indirect investments (financial institutions and private equity funds). Our E&S specialists also received human rights training and coaching and mentoring from experts. Furthermore, we published a human rights defender approach that we apply once evidence arises that individuals are facing violence or threats of persecution due to engagement in an activity financed or considered for financing by FMO. For all high E&S risk clients we perform E&S due diligence, including human rights. At year-end 2019, for 308 clients in our portfolio E&S due diligence including human rights was performed.