Report of the Supervisory Board
In 2022, FMO put important steppingstones in place for growing its impact. Once most COVID-19 measures were lifted, employees were able to travel again, visit (potential) customers and rebuild the portfolio. At the same time, under the guidance of FMO’s new CEO Michael Jongeneel, the Management Board began to reformulate its long-term goals. In September, this resulted in the updated strategy towards 2030.
The strategy ‘Pioneer – Develop – Scale’ carves out a clear path for FMO to maximize its impact, setting very ambitious goals for, amongst others, mobilization and high-impact investments. Within the 2030 strategy, FMO defines its sphere of influence more broadly than before, for example, by adding market creation to its goals. Market creation encourages the development of more bankable opportunities for FMO and other DFIs and lays the foundation for future impact. FMO is widely acknowledged to be one of the first amongst its peers in this space, showing once again its entrepreneurial and innovative character. Partnerships with, among others, DFIs and local NGOs, will be pivotal for success.
Looking at the ambitious 2022 targets for impact, FMO reported mixed results. With just over €1 billion in Green labelled new investments, the Green target was nearly reached. The Reducing Inequality-labelled new investments, on the other hand, fell short of the target, resulting from a more challenging investment climate and a longer lead time to develop such projects post-COVID. Still, FMO’s impact ambitions remain high - and rightly so - as investments to create local impact are essential. To be a better-informed sounding board for the Management Board (MB) on FMO’s impact numbers during the year, the SB will adopt the same reporting method for impact used for the financial numbers, including quarterly updates. This will allow us to discuss FMO’s impact with the same analytical approach as the financial numbers, giving both equal weight and attention in our discussions.
Unrest in FMO’s markets, specifically caused by the Ukraine war, led to losses in both the equity and loan portfolios, resulting in lower profit in 2022 compared to 2021. As SB, we focus more on the trend in FMO’s stable income in relation to its organizational expenditures. In 2022, the two were well balanced. The impact ambitions towards 2030 do require the stable income to stay aligned with the expected higher operating expenses, largely driven by adapting to regulations and the hiring of more staff. We will closely monitor the financial situation and together with the MB explore cost-conscious measures, if needed. We have full confidence in the MB soundly guiding a balanced growth of the organization.
Although the year showed global upheaval and disruption, 2022 also brought internal stabilization for FMO. Through regular contact with staff, the SB noticed that the work culture is taking a positive turn. We acknowledge that the organization is going through substantial changes and are grateful for the resilience of FMO’s staff, as absorbing changes requires effort and patience. This year was also Michael’s first full year as CEO, and with the extension of the Management Board to five members, the team is well-positioned to take on the projected growth of impact and complexity of the organization.
Ongoing attention goes towards regulatory compliance. Upon concluding the Financial Economic Crime (FEC) Enhancement program and the related Know Your Customer (KYC) file remediation at the end of 2021, FMO has further grown its KYC capabilities by embedding the KYC department in the frontline of the investment process. We see this as an essential step towards making regulatory requirements an integral part of the investment process. As a result of the file remediation, FMO reported a limited number of incidents to the DNB at the end of 2021 and the beginning of 2022. These involved late notifications of unusual transactions to the Financial Intelligence Unit (FIU). DNB initiated an investigation into these incidents and the related KYC files. We expect this investigation to result in enforcement measures by DNB.
Society demands that every financial institution meets high regulatory standards. At the same time, increased stakeholder expectations on impact, together with FMO’s high ambitions, elevate risk levels. Learning cycles in projects that did not turn out as expected, provide valuable insights into how FMO can improve. For example, contextual analysis involving multiple stakeholders has proven to be vital, particularly in fragile surroundings. However, it must be acknowledged that FMO’s geographies come with inherent and often high risks.
FMO has a highly motivated workforce, focused on FMO’s mission to enable entrepreneurs to increase inclusive and sustainable prosperity. In 2023, challenges exist in combatting high impact ambitions and onboarding many new employees in a tight labor market, while a global recession looms on the horizon. The ongoing war in Ukraine and political and economic instability in some of FMO’s geographies can negatively affect FMO’s portfolio and lower the demand for capital. Conversely, recessionary environments may lead to greater additionality for development finance institutions, which offer a counterweight to these challenges. Development cooperation in general is under debate in a changing world. FMO is part of this wider system: it needs – and wants – to participate in the discussion, contributing its capabilities, resources, and people to enable the development impact that is needed, in close connection with other players.
The next phase for FMO is to execute its updated and more ambitious long-term strategy and to maximize impact towards 2030. In 2023, this starts with increased investments in reduced inequality and climate action, advancing market creation, and further investing in efficiency and FMO’s staff capabilities. And as always, it will involve staying focused on the long-term, remaining nimble and resilient, and adapting to circumstances along the way.