Environmental, social and governance standards
Environmental, social, human rights and governance (ESG) standards are an integral part of FMO’s investment process and serve several goals. First, they help protect the environment and our stakeholders, such as employees, workers and communities against adverse impact, including infringements of human rights. Second, they help our customers to contribute positively to the Sustainable Development Goals (SDGs). Third, they reduce risks to our customers and, indirectly, to FMO.
In addition, our ESG standards require customers to embrace good corporate governance (CG). Good CG breeds trust between management, investors, employees, and other stakeholders through accountability, transparency, and fair business practices. Poor governance increases risk. Improving governance not only adds value to customers, it also boosts portfolio performance and health.
FMO’s ESG standards are anchored in our Sustainability Policy, which guides our contribution to sustainable development with respect to both development impact and ESG. This is supplemented by our position statements on topics such as human rights, land governance and coal. We have adopted the IFC Performance Standards as our operating standard. Furthermore, we are guided by the United Nations Guiding Principles for Business and Human Rights (UNGPs), the OECD Guidelines on Multinational Enterprises, the Equator Principles, the International Labor Organization Declaration on Fundamental Principles and Rights at Work and the Center for Financial Inclusion Customer Protection Principles.
ESG risk management
ESG risk management is a fundamental part of our strategy where we continuously assess and aim to improve the ESG performance of our investments. We see this as crucial to creating genuine impact, while addressing reputational risk to its customers as well as FMO’s own organization.
FMO assesses and categorizes the ESG risks of all potential investments. FMO has 29 ESG specialists, who are embedded in our investment teams. They are involved in all high ESG risk transactions to support DD and transaction monitoring. They assess a potential customer’s performance against our ESG standards, identify risks and opportunities for improvement and prepare action plans. Investment staff are furthermore 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. Our ESG specialists report to the Director of Impact & ESG.
Disclosure and stakeholder feedback is an important element of FMO’s ESG risk management process. In 2021, we decided to adjust our disclosure policy regarding the disclosure length of proposed investments and to make it easier for local communities to access ESG information.
We work closely with other DFIs to ensure our ESG approaches are more harmonized. Greater harmonization creates a level-playing field, helps to create greater impact and leads to efficiencies for customers working with multiple DFIs. In 2021, FMO participated in various EDFI harmonization work streams, including the Fossil Fuels exclusions and the update of the Direct Investments E&S harmonized standards.
Respecting and promoting human rights is an integral part of sustainable development. While human rights are enshrined in various laws, businesses can undermine these rights through their action or inaction, especially in countries where ESG conditions are less favorable. For example, 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 significant potential to strengthen human rights, for example by involving local communities in their (planned) activities, providing good-quality jobs or encouraging gender equality 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 the measures to respect and strengthen human rights are identified.
In recent years, FMO has strengthened its rights-based approach to ESG risk management. In 2021, we made it easier to share information internally through our centralized serious incident register, which tracks customer reports of fatalities, serious injuries, and environmental accidents. In addition, FMO developed internal guidance to integrate specific aspects with a human rights lens, including how to conduct a country contextual risk assessment and how to include human rights in DD, and developed an approach to ascertaining broad community support.
At FMO we continued to rely on third parties to verify human rights topics through contextual risk assessments, E&S information disclosures and stakeholder engagement, broad community support and a customer’s performance. We conducted physical meetings when possible with stakeholders such as affected communities, civil society, and local authorities. For a brief period in Q4 2021, we were able to resume site-based monitoring activities of several high risk and low performing customers.
FMO continued to follow the EDFI harmonized COVID-19 DD and monitoring ESG guidance to mitigate the risk related to outsourcing these activities. More broadly, FMO worked closely with other EDFIs towards improving alignment on human rights DD and has been an active member of the EDFI Human Rights Working Group.
For high E&S risk customers, FMO performs E&S DD with a human rights lens. At the end of 2021, 281 customers in our portfolio went through such an exercise (2020: 301 customers).
Salient human rights issues
FMO considers human rights salient when they pose the most severe negative impact on people through our customers’ activities or business relationships. The 'Performance on our strategy' chapter gives insight into these issues, with a breakdown of their risk level and likelihood, and what customers are doing to mitigate them. In addition, we provide an overview of the E&S performance gaps in our portfolio, which includes a description of how rightsholders may be affected in situations where this pertains to human rights infringements. Furthermore, we report on the type and number of fatalities reported by our customers.