How we apply our investment process
How we apply our investment process
Our investment process consists of the following stages. Through case studies we illustrate how ESG is an integral part of this process.
We identify investment opportunities within our markets that contribute to our three SDGs. We check geographic limitations, the exclusion list, the viability of the investment plan and the business itself. We also check if our investment is additional.
We make an initial assessment of risks and opportunities, define the terms of our engagement, and scope any further assessment needs. We conduct a KYC assessment to ensure that the customer complies with anti-money laundering, anti-corruption and anti-terrorist financing regulations. We also assess potential effects on environmental, social, governance and human rights issues. We document this in a Clearance in Principle (CiP) proposal, informing our decision to continue preparing for a final investment decision.
We carry out a detailed project assessment. We document the results in a finance proposal informing FMO’s final decision to invest. We perform a site visit and meet with stakeholders or seek alternative measures when a site visit is not possible due to COVID-19. Where needed, we engage outside experts. We define and negotiate further ESG requirements and conduct further human rights risk assessments. This includes on-the-ground research and consultation with local civil society.
FMO considered funding a group of food processors that aimed to improve access to staple foods to vulnerable people in a country on the verge of famine. We needed to assess the impact of financing food imports on human rights, but the country’s conflict and COVID-19 situation made it impossible to visit. FMO conducted a virtual due diligence, viewing video footage of the facilities and conducting virtual interviews with staff, UN agencies such as ILO and IOM, local subject matter experts, local Dutch Embassy staff, local and international NGOs. These stakeholders provided valuable information on the human rights risk and mitigation measures.
Our Credit Department evaluates all finance proposals and writes a credit advice in support of a final investment decision. After approval, FMO discloses proposed investments for 30 days prior to contracting. This gives stakeholders the opportunity to share their concerns with us.
When asked to approve a refinancing proposal for an existing transmission and distribution customer, FMO was concerned about the number of fatalities at the plant and in the community. Deaths are common in this sector because of electricity theft and poor health and safety measures around plants. FMO views this as a sectoral issue and by 2020 set up internal and external work streams. In 2021, after months of discussions with one of our partners involved in this trajectory, work commenced on a sector-specific health and safety toolkit. This is intended to influence the management and operations of existing and future transmission and distribution customers. FMO approved the transaction based on the ongoing proactive engagement with the issue.
FMO includes ESG requirements and conditions in its agreements with customers to ensure that they are legally binding. We disclose a summary of the proposed and contracted investments during the full tenor of our engagement on the World Map page on our website.
We received a letter from a group of NGOs after FMO disclosed a planned investment in a financial institution (FI). They expressed concerns about the exposure of the FI to high-risk projects. FMO engaged with the NGOs and listened to their concerns. We explained our policies and procedures, including how E&S risks would be managed and monitored through an environmental and social management system. The NGOs suggested improvements to the FI’s grievance mechanism. Based on this, FMO developed and implemented an environmental and social action plan for the transaction, which was enriched by the engagement with the NGOs consortium. FMO continues to work with the FI to enhance its E&S and human rights risk management.
Disbursement can take place upon achievement of the conditions, ESG and other, set out in the legal agreement.
Throughout the lifetime of the investment, we monitor performance and look for opportunities to add value. We continue to work with our customers to ensure implementation of our ESG requirements. We review the customer’s and consultant’s ESG monitoring, accident and incident reports. We conduct customer visits and perform an annual customer credit review. We regularly check whether the community still supports the investment.
After a contractual agreement had been reached by a group of investors, FMO performed a corporate governance review of a ring-fenced subsidiary. Based on this, it helped the company design and adopt far-reaching governance improvements. These included setting up Board, Executive and Audit Committee charters, establishing a Remuneration and Nomination Committee, organizing annual strategy meetings and developing conflict of interest policies. These substantially improved the subsidiary’s board structures and processes, so much so that the assignment was extended to the holding company, which was not an FMO customer.