ESG value creation

Through our environmental, social & governance (ESG) engagement we intend to create opportunities for positive impact across the SDGs while mitigating potential negative impacts of our investments. Our ESG principles and practice have evolved to a discipline operating at the intersection of risk management, positive impact, and customer value creation. We identify dilemmas or issues, establish collaborations and partnerships, utilize technical assistance, provide trainings, and engage with customers or sectors aiming to shift mindsets or approaches. These efforts enable us to influence customer practices or potentially entire industries. Customers which elevate their ESG practices and demonstrate positive outcomes can transform business operations and may improve access to funding.

FMO has adopted the IFC Performance Standards (2012) as its operating standard. In 2016, we launched the Sustainability Policy Universe, a framework of documents and tools that guides us around environmental and social (E&S) impact management and in improving the corporate governance of our customers. Our Sustainability Policy was approved by FMO’s Management Board in 2016. The policy is complemented by position statements on human rights, land governance, fossil fuels and coal and on Impact and ESG for Financial Intermediaries. We are further guided by the United Nations Guiding Principles on Business and Human Rights (UNGPs), the OECD Guidelines for Multinational Enterprises and the Client Protection Principles.

Our policies and position statements, available on our website, undergo targeted and public consultation with various stakeholder groups during the development process and are formally approved by the Management Board.

ESG risk management

ESG risk management is a fundamental part of our investment strategy. Customer selection is evaluated on potential ESG risk exposure and client capacity on and commitment to manage the E&S impacts and risks associated with its operations. Continuous monitoring and improvement of the ESG performance of our customers is crucial to creating value.

Both E&S and corporate governance (CG) specialists are part of the deal teams to assess customer performance to identify risks and opportunities for improvement. E&S specialists are involved in all high E&S risk transactions through screening, due diligence, contracting and transaction monitoring. In addition, CG specialists are involved in high corporate governance risk transactions. Investment staff are responsible for managing low and medium risk transactions. An independent team of E&S specialists review these assessments and provide an independent opinion on the suitability of an investment. Following a positive investment decision, ESG requirements are included in a customer’s contract. We monitor the implementation of ESG actions throughout the investment period by regular contact and site visits, often supported by independent consultants.

In 2023, we implemented our updated disclosure policy. 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. Disclosures of proposed (high E&S risk17) investments are provided in six languages. This levels the playing field, helps to increase impact, and leads to efficiencies for customers working with multiple DFIs.

As we seek ways to improve our customers’ ability to mitigate and manage ESG risk, we believe we have a role to play as ESG change agent. In 2023, we developed a free online environmental and social management system (ESMS) toolkit for financial intermediaries. This empowers banks and financial institutions to manage ESG risk on both transaction and portfolio levels. Furthermore, we organized a masterclass in Kenya for African private equity funds to share ESG best practices. In addition, FMO hosted the Autumn ESG and Development Effectiveness Network Event for the Association of European Development Finance Institutions (EDFI).

Human rights

The protection, promotion and respect of 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 generally less favorable.

FMO’s ESG risk management approach is rights-based. We include perspectives of employees, affected communities and other stakeholders (or right-holders) in customer due diligence and engagement processes and take adequate measures to strengthen customers’ ability to respect 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 further insights on the current performance of our high E&S risk portfolio, broken down by applicable IFC Performance Standard, and an overview of our portfolio’s performance gaps, including a description of how rights-holders may be affected.

FMO has developed human rights due diligence guidance, which supports our E&S staff in applying a human rights lens throughout the investment process. This guidance covers contextual risk18 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 a serious incident register to track customer reports of fatalities, serious injuries, and environmental incidents, and a Sustainability Information System (SIS) to track our customers’ E&S performance, including its most salient human rights risks. In 2023, together with Austrian DFI OeEB, FMO led the EDFI working group on human rights. This resulted in further guidance on the implementation of the UNGP, and an updated EDFI harmonized human rights and contextual risk toolkit linked to the different stages in our investment process.

17 FMO's E&S risk categories follow the IFC’s Environmental and Social Risk Categorization Framework. Category A and B+ are considered high risk. Refer to the Sustainability Policy on our website.

18 Contextual risk analyses allow us to identify drivers of risks such as human rights violations, governance (rule of law), legacy issues, dependencies on natural resources and (geo-)political issues that may be relevant specifically to a market, sector, region, country, or even a locality that should be taken into consideration when evaluating general ESG risks associated with a particular investment. Such risks are often out of the direct management control of the investment itself but could influence outcomes at the investment level.