Environmental, social and governance standards
Environmental, social (including human rights), and governance (ESG) standards are an integral part of our investment process and serve several goals. First, they help protect the environment and our stakeholders, such as employees, workers and communities, from negative impacts. This includes infringement on their human rights. Second, they help our customers to positively contribute towards the Sustainable Development Goals (SDGs). Third, they reduce risks to our customers and improve trust between management, investors, employees and other stakeholders through accountability, transparency, and fair business practices. This allows us to have positive development impact and reduce investment risk at the same time.
FMO has adopted the IFC Performance Standards as our operating standard. In 2016, we launched the Sustainability Policy Universe, a framework of documents and tools that guides us around ESG and impact management. Our Sustainability Policy, approved by FMO’s Management Board in 2016, is complemented by Position Statements on human rights, land governance, fossil fuels and coal. In 2022, we published a Position Statement on Impact and ESG for Financial Intermediaries. Furthermore, we are also guided by the United Nations Guiding Principles on Business and Human Rights (UNGPs), the OECD Guidelines for Multinational Enterprises, the Equator Principles, and the Center for Financial Inclusion Client Protection Principles.
We communicate our policy commitments publicly on our website. Additionally, we reference the IFC Performance Standards in our contractual agreements with customers. Our policies and position statements undergo targeted and public consultation with various stakeholder groups during the development process and are formally approved by our Management Board.
ESG risk management
ESG risk management is a fundamental part of our investment strategy. We continuously assess, categorize and strive to improve the ESG performance of our investments, as we believe this is crucial to creating positive impact.
FMO assesses and categorizes the ESG risks of all potential investments. We have 33 ESG specialists that are involved in all high ESG risk transactions through screening, due diligence, contracting and transaction monitoring. They help to assess a potential customer’s performance against our sustainability policy, identify risks and opportunities for improvement and prepare action plans. E&S specialists in our Credit team provide independent scrutiny and challenge. Investment staff are responsible for managing the medium and low ESG risk transactions. Following a positive investment decision, ESG requirements are included in a customer’s contract. We monitor the implementation of ESG actions through regular contact and site visits, often supported by independent consultants. The ESG specialists in the investment teams and E&S specialists in our Credit team report to the Director of Impact and ESG and the Director of Credit, Legal and Special Operations respectively.
Disclosure and stakeholder feedback are integral to our ESG risk management. By enabling stakeholders to provide feedback or additional information, we can make inclusive investment decisions, enhance the design and implementation of projects and policies, and strengthen development outcomes. In 2022, we updated our Disclosure Policy, extending the disclosure period of proposed (high-risk) investments and making this information available in six key languages.
We work closely with other Development Finance Institutions (DFIs) with the aim to harmonize our ESG approaches. Greater harmonization levels the playing field, helps to increase impact and leads to efficiencies for customers working with multiple DFIs. In 2022, FMO participated in various harmonization work streams led by the EDFI - the Association of bilateral European Development Finance Institutions (EDFIs) - including the Refinement of Project and Portfolio level Paris Alignment, Harmonization of E&S standards for fund investments, Harmonization on quality jobs metrics and a revision of the climate and energy statement.
Respecting and promoting human rights is integral to sustainable development. While human rights are enshrined in various laws, businesses can sometimes undermine these rights through their action or inaction, especially in countries where ESG conditions are less favorable.
A rights-based approach to ESG risk management aims for employees, affected community and other stakeholder perspectives to be included in customer engagement processes and for measures to be taken to strengthen human rights.
FMO invests in a wide range of activities. In recent years, we performed an in-depth analysis of human rights issues in each of our investment portfolios, resulting in the identification of the following five salient human rights issues, which can be interlinked:
Right to life | Avoid workplace and community fatalities related to customer activities, e.g. workplace accidents, traffic accidents, and threats and oppression of critics and opponents.
Right to decent work | Respect labor rights, wages, occupational health and safety, workplace accommodation, and family life.
Rights of vulnerable people | Ensure that vulnerable individuals or groups are identified and their rights are respected.
Right to an adequate standard of living | Ensure adequate food, housing, water, sanitation, education, good governance of tenure of land, fisheries and forests.
Right to not being subject to cruel and inhumane or degrading treatment | Ensure protection from rights violations related to project security.
FMO considers human rights issues salient when they have the most severe negative impact on people through our customers’ activities or business relationships. The chapter 'Performance against our strategy' provides insights on the current performance of our high E&S risk portfolio, broken down by IFC performance standard. In addition, we provide an overview of our portfolio’s performance gaps, which includes a description of how rights-holders may be affected in situations where this pertains to human rights infringements.
We provide human rights due diligence guidance to support our E&S staff in applying a human rights lens throughout the investment process. This guidance covers contextual risk analysis, a broad community support check, a Free, Prior and Informed Consent (FPIC) check and a land rights assessment. In addition, we continue to strengthen our rights-based approach to ESG risk management by improving our systems and tools. This includes our serious incident register, which tracks customer reports of fatalities, serious injuries, and environmental accidents, and our sustainability information system, which tracks customer’s most salient human rights risks. In 2022, we worked with other EDFIs to produce further guidance on conducting human rights due diligence and monitoring.