ESG risk management
We have five management tools for tracking ESG performance:
The ESG performance target applies to the high-risk portfolio (‘target list’) and aims to have at least 90% of high and medium risks managed at a satisfactory level.
For customers with contractually agreed Environmental and Social Action Plans (ESAPs), we monitor progress towards ESAP implementation to ensure that our investments comply with our policies and standards within a reasonable time-period.
All high and medium E&S risks of high-risk customers, which are not yet managed at a satisfactory level, are included in the E&S Management gap table. By identifying gaps, we are able to focus our attention on engaging with our customers to resolve these.
The Serious Incidents Register is used to monitor customer reports of adverse events across our portfolio such as fatalities, serious injuries and environmental accidents. In all such cases, a root cause analysis (RCA) is requested from the customer in order to promote learning and prevention. FMO may also conduct portfolio level RCAs to improve our processes with respect to customer incident management.
Our Independent Complaint Mechanisms enables the resolution of disputes, organizational learning and the improvement of our current and future operations.
E&S risk profile of our customers
FMO categorizes the risk profile of its customers as follows: A & B+ (high risk), B (medium risk) and C (low risk) for direct investments and ID-A (high risk), ID-B (medium risk) and ID-C (low risk) for indirect exposure through Financial Institutions and Private Equity Funds. The following charts show the risk profile for our entire portfolio and for the new customers that were contracted in 2020. Out of 746 total customers, 347 are categorized as A or B+.
The following chart displays the type of risks, as defined by the IFC Performance Standards, and frequency with which these occur in our high E&S risk portfolio. The scale of potential issues in our portfolio is determined by the type, frequency and degree to which these risks are managed by our customers.
ESG target performance
The ESG performance target applies to the high ESG risk customers in our portfolio contracted prior to 2020 (‘target list’). We register and monitor the different types of ESG risks of our high risk customers and aim to have at least 90% of the high and medium ESG risks managed at a satisfactory level.
Description and methodology
Since 2018 we have been using a new ESG performance tracking system. The initial performance target was set for a limited number of new customers classified as high-risk or supported by a Corporate Governance specialist in transactions where FMO was in the lead. Each subsequent year the target list was extended to include a bigger part of our portfolio. In 2020, the list consisted of all high-risk customers and those supported by a CG specialist, including investments where another financial institution is in the lead (e.g. IFC, DEG, Proparco, etc.). The target remained the same: 90% of high and medium ESG risks should be managed in line with our standards or evidently towards meeting our standards.
We monitor all medium and high E&S risks in our portfolio. Out of a total of 746 customers, 347 customers had a high E&S risk category (A or B+) and 3 customers were supported by a CG specialist. Consolidating those that are part of a group of customers led to a target list of 293 customers, which represented a total of 2,872 ESG risks that were tracked during the year. The 2020 results showed that 93% of high and medium risks were managed adequately by our high risk customers, exceeding our target of 90%.
In 2020, we introduced a new Sustainability Information System with better capabilities to manage and track ESG performance in our portfolio. To enhance the granularity of our assessments we have redefined the risks under each Performance Standard and introduced five different performance levels, replacing the previous three. In the interest of continuity with respect to ESG performance reporting, the existing assessments have been translated to the new methodology.
E&S management gaps in our portfolio
FMO accepts that when we first start working with a customer, the ESG performance may be below standard. We do, however, expect performance to improve over time in line with agreed action plans. Most customers show good progress towards these plans. FMO has identified 53 A and B+ customers that are not managing one or more of their E&S risks in line with expectations and demonstrate management gaps, which sometimes lead to incidents or issues. FMO works with these customers to address such gaps, in order to fully realize their positive impact potential. The total committed portfolio for these 53 customers amounts to €1 billion, which contributes to economic growth (SDG 8) in developing countries. Furthermore, more than half of this portfolio also contributes to climate action (SDG 13) and/or reducing inequalities (SDG 10).
In most cases, we are confident that we can bring customers back on track within a reasonable timeframe. In some instances, however, E&S impacts are irreversible. In other cases, a management gap may be the result of a bigger (financial) problem the customer is facing which requires the restructuring of a loan or a full exit. In these cases our engagement will differ. The following table shows the gaps and our approach. It also includes the number of customers for which gaps have been identified (represented in the table by the letter 'n'). The sector breakdown is similar to that of our high-risk portfolio that was provided earlier in this chapter. An explanation of the criteria used to compile this table are included in the chapter 'How we report'.
Description of identified gaps
PS1: Assessment and management of E&S risks and impacts (n=22)
Weaknesses in the identification, evaluation and management of E&S risks. E.g. insufficient policies, procedures and management plans, budgets or organizational capabilities, or customer’s commitment to improve on E&S risk management. Gaps in this area can lead to adverse impacts to people and planet, including infringements of human rights as referenced in the items below.
FMO supports customers to improve on E&S risk management, e.g. through CD. If gaps continue to persist, FMO will exercise its influence – directly or via the lead lender – to motivate the customer to improve in these areas. E.g. by withholding additional financing or disbursement, triggering default and other legal clauses or building incentives as part of restructuring.
PS1: Stakeholder engagement, external communications and grievance mechanisms (n=17)
Lack of effective community and other stakeholder engagement and insufficient mechanisms to ensure grievances are responded to appropriately. This may stem from insufficient disclosure of project information, delayed implementation of a robust community engagement plan and process or insufficient channels and/or response to deal with grievances. In some cases, affected communities have expressed dissatisfaction with the way a customer has engaged with and/or has managed the impact on them. Gaps in this area can lead to adverse impacts on people and planet, including infringements on the freedom of opinion and expression, and – if not resolved or effectively de-escalated – inhuman treatment, retaliation, and risk to lives.
We intensify our customer engagement and monitoring and offer support where possible. For instance, by connecting them to experts in the field and/or providing CD funding.
PS2: Labor and working conditions (n=20)
Lack of visibility on working conditions of (sub)contracted employees, (risk of) delays or interruptions in paid wages, poor employee accommodations or fear of reprisals for addressing such issues. Gaps can lead to substandard labor and working conditions and infringements on labor rights, including the right to decent work, freedom of association, equal opportunity, just and favorable conditions of work, and protection against discrimination.
We discuss gaps with the customer and exercise our leverage to improve the situation, e.g. by making disbursements conditional to an agreed improvement. We also help to prioritize issues, facilitate engagement with external experts, support them in managing COVID-19 in the workplace or offer CD funding.
PS2: Occupational health and safety (n=16)
Gaps in ensuring safe and healthy working conditions e.g. lack of Personal Protective Equipment at construction sites, poor housekeeping practices at construction sites and insufficient (sub)contractor oversight. In some cases, this is combined with higher number of fatalities, serious injuries, accidents or COVID-19 infections in the workplace. Such gaps can lead to infringements of human rights, most notably the right to health and safety in the workplace, and – in case of fatalities – the right to life.
We discuss these gaps with the customer and exercise our leverage to improve the situation, e.g. by making our disbursements conditional to an agreed improvement. We also help in prioritizing issues and facilitating engagement with external experts.
PS3: Resource efficiency and pollution prevention (n=15)
Resource efficiency: lack of sustainability-certified water suppliers in water-scarce-areas and significant cumulative impacts on groundwater from earlier projects and outdated equipment. Pollution prevention: problems controlling effluent, noise and air quality, delayed waste management planning and implementation or delayed replacement of old equipment to meet emission standards. Gaps can lead to adverse impacts on employee and public health, including infringements of human rights to health and life, the rights of the child and the right to live in a safe, clean, healthy, and sustainable environment.
We discuss these issues with the customer and exercise our leverage to improve the situation, e.g. by making our disbursements conditional to an agreed improvement. We also help in prioritizing issues and facilitating engagement with external experts.
PS4: Community health safety and security (n=18)
Substandard management practices around e.g. the protection of communities near assets and equipment, traffic management or providing information to demonstrate that community health, safety and security is managed well. In some cases, this is combined with serious incidents involving the public, e.g. car accidents or gender-based violence. Gaps also exist in the management of security personnel, which we consider a driver of safety and security risk to employees and local communities and possible infringements of their right to work and live in a safe environment and be fee from inhumane or cruel behavior.
We discuss these issues with the customer and exercise our leverage to improve the situation. We also help to prioritize issues and facilitate engagement with external experts. In case of serious incidents, FMO requires customers to conduct a root cause analysis and supports the implementation of corrective measures to prevent such incidents from recurring.
PS5: Involuntary land acquisition and resettlement (n=10)
Substandard or delayed implementation of resettlement and livelihood restoration plans that in some cases did not sufficiently recognize vulnerable groups, which was further constrained by COVID-19 restrictions. In other cases, the compensation of rightsholders had to be upgraded to international standards or there were tensions over land access. Gaps can lead to impoverishment of those affected and infringe on their right to a standard of living that is adequate for their health and well-being, including notably the right to food and adequate housing.
We help to find an expert to lead on this highly specialist topic in conducting gap analyses and implementing recommendations. In the event of an early exit, FMO offers to reimburse prepayment fees upon full implementation of livelihood restoration plans among other E&S mitigation measures to ensure a responsible exit.
PS6: Biodiversity conservation and the sustainable management of living natural resources (n=18)
High mortality rates of birds and/or bats, delayed preparation of biodiversity monitoring plans or substandard implementation of such plans. Some customers are delayed in achieving soft commodity sustainability certification, are yet to include supply chain activities in their biodiversity risk management strategy or have not yet fully operationalized their commitment to zero-deforestation. Biodiversity impacts can affect communities’ access to forest products or other ecosystem services thereby potentially infringing on the right to food and/or a adequate standard of living.
FMO may intensify its customer monitoring, engage a biodiversity expert to improve on these matters or exercise its influence to improve the situation.
PS7: Indigenous peoples (n=4)
Lack of awareness of requirements in community engagement processes that do not meet FPIC and/or do not allow for sufficient participation of these communities. In some cases, the needs of indigenous peoples are not sufficiently addressed in livelihood restoration and community development plans. Other gaps are driven by challenging operating conditions where risks to these communities are difficult to control. Gaps may lead to the infringement of indigenous peoples’ right to food and other necessities, and their specific rights to manifest, practice, develop and teach their spiritual and religious traditions, customs and ceremonies and to maintain, protect, and have access in privacy to their religious and cultural sites.
FMO exercises its influence to obtain customer commitment to implement requirements where possible. This consists of additional efforts to ensure community development, livelihood restoration and resettlement plans are accepted. We may also intensify monitoring of contextual risk factors related to the politicization of indigenous peoples issues, tensions between different communities and violence against defenders of indigenous peoples’ rights.
PS8: Cultural heritage (n=2)
Failure to protect cultural heritage. Such gaps can infringe on the rights of individuals and communities to know, understand, visit, make use of, maintain, exchange and develop cultural heritage and cultural expressions, as well as to benefit from the cultural heritage and cultural expressions of others.
FMO is working with its customers on a proposal for a community development program to compensate for adverse social impacts caused by the project.
Financial intermediaries: financial institutions and fund managers (n=11)
Substandard system for identifying and managing E&S risks of financed activities. In some cases, processes and procedures are unclear, E&S management responsibilities are insufficiently defined and/or capabilities are lacking. In other cases, there is little evidence that E&S DD and monitoring are executed well and that E&S advice has been included in customer contracts. This is sometimes compounded by contextual risk factors, including the lack of exposure to and experience in E&S risks management by the financial sector in our markets and the lack of a level-playing field. Gaps can lead to infringements of all types of human rights as referenced before.
We support customers by providing expertise and funding for developing the ESMS or sitting on E&S risk management committees established by the fund manager. We exercise our leverage – alone or together with other lenders or Limited Partners to a fund – to negotiate improvement plans as part of a repeat investment or through the Advisory Board in which we have a seat. In select cases, we initiate or contribute to sector initiatives to address contextual challenges.
Unfortunately, serious incidents at our customers cannot always be avoided considering the large number of people that are employed by our customers, the higher-risk sectors we invest in and the challenges that go hand-in-hand with operating in emerging markets. To help customers minimize these risks, FMO’s environmental and social due diligence is designed to identify areas where a customer’s mitigation practices fall short of (international) standards, to be able to agree actions to improve mitigation practices, so that our customers can - as best as possible - prevent such accidents and incidents from occurring.
Description and methodology
FMO requires its customers to immediately report any incident occurring on or nearby any site, plant, equipment or facility belonging to the customer or any member of the Group that has resulted in the loss of life (fatalities), has had a material effect on the environment or has resulted in a material breach of the law – inter alia – and how the incident was dealt with. FMO takes each report serious and follows up on each incident to ensure that an effective root cause analysis was completed, and corrective action plans were implemented to prevent similar events from recurring.
In many emerging markets, where occupational health and safety (OHS) norms and regulatory systems are often weak, serious accidents present an ongoing challenge. FMO’s environmental and social due diligence is designed to identify areas where a customer’s mitigation practices fall short of (international) standards. Where gaps against international standards are identified, an environmental and social action plan is agreed to close those gaps in a timely manner. Furthermore, FMO helps its customers to develop their OHS risk management capabilities, for instance through site visits, guidance materials and training, capacity development funding and informal support. We believe that strong OHS management systems are part of an employer's duty of care, improve job quality and add value to a business.
In 2020, FMO introduced a new process for registering these cases in a centralized system. This is currently being rolled out in a phased approach, starting with A and B+ customers in 2020. In 2021, the process will be expanded to B and C customers. Nevertheless, some teams have already started registering serious incidents for B and C customers.
In 2020, we regret to inform that 20 FMO customers reported 44 fatal incidents with a total of 53 casualties. 10 of those were directly employed by our customers (as employees or contractors/suppliers), 23 worked in the underlying companies of funds and 20 concerned members of the general public. Of the 44 incidents, 21 were road accidents, 10 work-related, 6 asset-related, 4 security-related, 1 resulted from illness and 2 were classified as ‘other’. FMO aims to provide a total overview of all fatalities resulting from the activities it finances and trusts that its customers hold themselves to the contractual agreement to report any occurrence. However, as FMO relies on these instances being brought to our attention, there is an inherent risk that some incidents may not have been reported to us and, therefore, have not been included in these numbers.
Employees & contractor/supplier
Independent Complaints Mechanism
FMO has an Independent Complaints Mechanism (ICM) for project-related complaints, together with Deutsche Investitions- und Entwicklungsgesellschaft (DEG) and Proparco. This mechanism ensures the right to be heard for complainants who feel affected by an FMO-financed operation. This can lead to a resolution of the dispute or it enables FMO to apply lessons learnt to future investments through a compliance review.
The ICM consists of the Complaints Offices of FMO, DEG and Proparco and an Independent Expert Panel (IEP). The IEP decides on the admissibility of each complaint, performs preliminary reviews to determine whether a complaint should proceed to the next stage, and when applicable, either performs a compliance review or supports a dispute resolution process in accordance with the ICM Policy. The ICM also monitors the implementation of measures agreed upon to bring a project into compliance or agreed as outcome of a mediation process. The IEP is composed of three members with complementary expertise.
The COVID-19 crisis had a significant impact on the ICM’s activities. COVID-19 restrictions on traveling and gatherings have prevented the Panel from conducting certain planned activities such as site visits and in-person consultations. Therefore, the ICM adjusted its case handling, in discussion with the parties involved, as much as possible. The IEP continued its communications with complainants and other parties via videoconferencing and calls to achieve as much progress as possible under the circumstances. However, virtual communications with complainants and other local stakeholders have not always been possible and COVID-19 restrictions led to delays in handling and monitoring of cases. The ICM informed all complainants about adjustments of its work that were necessary to comply with COVID-19 restrictions. DEG, FMO and Proparco have placed a notification on their websites.
In 2020, eight complaints concerning one project were declared admissible and were subsequently handled as one case by the Independent Expert Panel. One other complaint pertaining to another project was declared inadmissible (2019: 0 admissible complaints). For information about the status of complaints filed in earlier years, please refer to our website.
FMO continues to support its customers and investees in the development of good Corporate Governance practices. The global pandemic and associated economic crisis has demonstrated that good Corporate Governance practices are essential to improve readiness and responses to risks and crisis situations. FMO launched a guidance note on the roles and responsibilities of Corporate Governance bodies in responding to any crisis and managing risks in general. In addition, we delivered two webinars widely attended by our investee companies on the role of the board of directors in crisis management.
FMO and DEG organized a Corporate Governance training for the directors that sit on the boards of our investee companies. Although the training this year was delivered virtually, this did not prevent participants from connecting and sharing lessons about their individual assignments.
Sector initiatives are a core part of FMO’s value-adding service as they positively contribute towards market and business development. Sector initiatives address systemic issues that hinder FMO customers and their peers from implementing E&S best practices and aim to ‘level the playing field’ by fostering alignment and creating common standards. Currently, we are committed to sector initiatives with wider impact-related topics and at regional levels. For instance, improving E&S standards in the hydropower and banking sectors in Nepal that is part of a wider market shaping effort with other DFIs and stakeholders. In addition, FMO started to explore the options for a new Sector Initiative focusing on the intersection of gender and climate change in Africa. We are further refining the concept to understand how we can identify female-led business models for climate action and empower role models on the topic of climate action by demonstrating feminine traits of collaboration, custodianship care and community balanced with strong decision-making. This initiative will be scaled-up in 2021, and will be called “The Rallying Cry”.
- 1 Resulting from contact with portfolio company's assets, such as an electricity distribution line.