Environmental, social and governance standards
Environmental, social, human rights and governance standards are an integral part of FMO’s investment process. Our ESG standards serve several purposes. First, they help protect the environment and our stakeholders like employees, workers and communities against adverse impact, including infringements of human rights. Second, they help our customers to contribute positively to the SDGs. Third, they reduce risks to our customers and, indirectly, to FMO.
Good corporate governance (CG) breeds trust between management, investors, employees, and other stakeholders through accountability, transparency, and fairness. Poor governance increases risk; many of FMO’s non-performing loans are rooted in weak governance. Improving governance therefore not only adds value to customers, it also helps us increase the performance of our portfolio. It further protects the reputation of FMO from issues such as corruption, which is present in some of our countries of operation.
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 customers to work towards meeting our ESG requirements. 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. The IFC Performance Standards cover: the 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.
ESG risk management
Our ESG standards are championed by a team of 32 environmental, social and corporate governance staff, who are embedded in our investment teams and are involved in individual transactions. Our ESG specialists and managers report to the Director of Impact & ESG.
FMO assesses all potential investments from an ESG risk perspective and categorizes them accordingly. ESG specialists are involved in all high ESG risk transactions to support due diligence and transaction monitoring. They assess a potential customer’s performance against our ESG standards, identify risks and opportunities for improvement and prepare action plans. Their advice is included in the Finance Proposal that is submitted for each investment decision. Investment staff are responsible for ESG performance management on medium and low ESG risk transactions. Independent scrutiny and challenge are provided by FMO’s Credit Department. Following a positive investment decision, ESG requirements are included in a customer’s contract. We closely monitor the follow-up of ESG actions through regular contact and site visits, often supported by independent consultants. The level of involvement from ESG specialists in transaction monitoring and support depends on a customer’s ESG performance, including residual risks.
We work closely with other DFIs to ensure our ESG approaches are harmonized. Greater harmonization creates a level-playing field, helps to create greater impact and leads to efficiencies for customers working with multiple DFIs.
Human rights in ESG risk management
Respecting and promoting human rights is an integral part of sustainable development. While human rights are enshrined in various laws, we are aware that businesses can undermine these rights through their action or inaction, especially in countries where baseline ESG conditions are less favorable. Poor health and safety can violate workers’ right to a safe workplace, while pollution can undermine a community’s right to health and an adequate standard of living.
At the same time, businesses have a significant potential to strengthen human rights, for example by properly informing and consulting local communities about their (planned) activities, providing good-quality jobs or encouraging gender equality in societies or sectors where this is not common practice. A rights-based approach to ESG risk management ensures employee, affected community and other stakeholder perspectives are included in customer engagement processes and in identifying the measures needed to respect and where possible to strengthen human rights.
In recent years, FMO has strengthened its rights-based approach to ESG risk management throughout the investment process. In 2019, we introduced further guidance on performing contextual risk analysis with a human rights lens. In 2020, we have started working towards extending this to our indirect E&S risk exposures in financial institutions and private equity funds. Furthermore, we centralized our serious incident register, which tracks customer reports of fatalities, serious injuries, and environmental accidents, and started expanding the register with a wider range of reported (potential) harm to people or the environment. More information on the serious incident register is provided in the ESG performance section.
In 2020, we have had to adapt our processes as a result of the COVID-19 pandemic. Due to the current travel restrictions, we rely on third parties to verify key human rights topics such as contextual risk assessment, E&S information disclosure and stakeholder engagement, broad community support and a customer’s on-the-ground performance. This includes physical meetings with the customer, employees, affected communities, civil society, local authorities and other stakeholders that are normally part of our due diligence and monitoring visits. We have developed COVID-19 due diligence and monitoring guidance to mitigate the risk related to outsourcing these activities.
For high E&S risk customers we perform E&S due diligence, which includes a human rights lens. At year-end 2020, this was done for 301 customers in our portfolio.
Salient human rights issues
FMO considers salient human rights issues as those that pose the most severe negative impact on people through our customer’s activities or business relationships. These include potential and actual issues in our portfolio. The ESG performance chapter gives insight into FMO’s most salient human rights issues. It provides a breakdown of our portfolio in low, medium, and high E&S risk. It further describes the type of risks and frequency with which these risks occur in our high E&S risk portfolio and customer performance on managing these risks, which informs the scale of potential issues.
The management gap table shows the type of risks and frequency with which these risks have not been managed to our satisfaction, including a description of how rightsholders may be affected and which areas pose the most severe risks to human rights infringement. We also include the type and number of fatalities reported by our customers.