Risk management

This chapter provides an overview of FMO's risk governance and risk management approach. The sections describe the risk domains relevant to FMO and developments throughout 2023. Together with the quantitative Pillar 3 disclosures - available on FMO's website - it constitutes FMO's Pillar 3 disclosure.

Risk governance

FMO defines risk as the effect of uncertainty on objectives. FMO has a comprehensive framework in place to manage and control risk, reflecting its banking license, State Support Agreement and a mandate to do business in high-risk countries. The risk management framework helps us realize our ambitions and safeguard our viability. Risk management practices are integrated across the organization, from day-to-day activities to strategic planning, to ensure both compliance with relevant regulations and adherence to the risk appetite. A sound risk management framework is in place to preserve FMO's integrity, which is essential for fulfilling its mission and upholding its good reputation.

The Management Board defines and promotes the desired corporate culture and high ethical and professional standards. Employees are encouraged to take the right risks in an informed manner, with integrity and careful consideration of the interests of all stakeholders.

The risk management framework is based on the 'three lines model', where the first line (Investment department and supporting functions) is challenged and advised by the second line (Risk department, Compliance department and Credit department), and the third line (Internal Audit) that performs independent assessments of the functioning of first and second line.

The organizational structure is shown below.

The Management Board has established risk committees to assist it in fulfilling its oversight responsibilities regarding the risk appetite of FMO, the risk management framework and the governance structure that supports it. The risk committees and their responsibilities are described below.


The risk committee structure has been reviewed and adjusted in 2023.

The Financial Risk Committee (FRC). The FRC is appointed by the Management Board as an independent body for the purpose of monitoring, challenging and deciding upon the execution of financial risk management within FMO.

The Non Financial Risk Committee (NFRC). The NFRC is appointed by the Management Board as an independent body for the purpose of monitoring, challenging and deciding upon the execution of non-financial risk and business risk management within FMO.

Both the FRC and NFRC are chaired by Managment Board members. Several sub-committees report into the FRC and NFRC, such as the Investment Committee, the Integrity & issue Management Committee, the Corporate Information Security Office and the Regulatory Monitoring Group. These sub-committees are chaired by directors.

Risk appetite and taxonomy

The risk taxonomy defines the main risk types and risk subtypes FMO is exposed to in the pursuit of its objectives. This common set of risk categories, types and subtypes facilitates the structuring of other elements of the risk management framework, such as the risk appetite and risk policies.

The risk appetite defines appetite bandwidths, alert and tolerance levels for main risk types and subtypes. The Risk Appetite Framework (RAF) is reviewed by the Management Board and approved by the Supervisory Board on an annual basis. If necessary, it can be revised during the year in case of material developments or a change in the strategic goals.

The risk appetite, governance, and monitoring metrics for each risk domain are described in more detail in the sections below. 

Pillar 3 disclosure

FMO publishes the required Pillar 3 disclosures on an annual basis in conjunction with the publication of the annual report. Together, these documents fulfil the Pillar 3 disclosure requirements of the Capital Requirements Directive (CRD).

The objective of FMO’s disclosure policies is to ensure maximum transparency in a practical manner. The consolidation scope for prudential reporting is equal to the accounting scope for FMO. FMO was granted the solo waiver for prudential reporting based on Article 7 and therefore only reports figures related to CRR on a consolidated basis.

Climate-related risk

FMO defines climate-related risk as the risks posed by direct exposure to climate change, or indirect exposure through counterparties that may potentially be affected by, or contribute to, climate change. These include two strongly interlinked perspectives:

  • An inside-out perspective, defined as the impact by FMO and its customers to climate (which is mainly covered by the ESG risk framework and fully integrated in FMO’s investment process in credit decisioning and inclusion in some risk models);

  • An outside-in perspective, defined as the impact on FMO due to physical and transition risks:

    • Physical risks arise from the physical effects of climate change, either chronic or acute.

    • Transition risks arise from the uncertainty related to the timing and speed of the process of adjustment to an environmentally sustainable economy. These risks can materialize through policies and regulations, technology, market developments, or behavioral changes.

In 2021, FMO began a project to embed climate-related and environmental risks within the organization based on the ECB Guide on Climate Related and Environmental Risks. Since 2022 FMO started piloting its methodology by performing a portfolio scan in four sectors (Financial Institutions, Energy, Agriculture, Food and Water, and Private Equity). The portfolio scan is the aggregated overview of climate related risks in FMO’s investment portfolio (i.e., all loans + private equity exposures) and provides an initial assessment of climate-related risk exposures in industries and geographies providing a view of risk concentrations in the portfolio. Risk areas identified by the portfolio scan can be followed up by a more in-depth analysis of specific transactions, industries, or geographies. This is in line with the recommendations set out by the Task Force on Climate-Related Financial Disclosures (TCFD) and the ECB Guide on climate-related and environmental risks. In 2023, FMO formalized its portfolio scan on physical risks, which was submitted to the Financial Risk Committee (Investment Risk Committee prior to Q4 2023) on a quarterly basis. With regards to Transition risk, FMO has further developed its methodology for Policy and Legal and Reputational risks, while Market and Technology risks are expected to be further developed in 2024.

Throughout 2023, FMO has been developing an application to operationalize climate risk assessment further into the investment process, which will support FMO's deal teams to carry out the climate risk assessments step by step. The application will be implemented as of 2024 and FMO expects that the roll-out of this tool will significantly improve our data collection. FMO is iteratively working on improving the application before implementation. Thus far, the tool has been piloted for around 25 customers, in collaboration with investment teams from all departments.

As part of our supervisory discussions, DNB has been assessing FMO’s progress in managing climate-related risks. In 2023, FMO conducted a materiality assessment and DNB provided feedback and indicated it estimates that FMO is on track to have a sound and comprehensive assessment in place by 1 April 2024. DNB noted that FMO has made significant progress in terms of embedding climate risk in it risk management and is undertaking further steps to improve its materiality assessments.

Finally, FMO has continued to work on integrating climate risks into internal policies and procedures and a climate risk policy has been established. For further information, please refer to the separate TCFD report.

IFRS Reporting Requirement

Certain disclosures in this ‘Risk Management’ section are an integral part of the ‘Consolidated Financial Statements’ and contain audited information. The audited parts concern risk disclosures of financial instruments (IFRS 7) and capital disclosures (IAS 1). The audited section runs from this introductory section through the ‘Capital adequacy’ sub-section until the end of the ‘Financial risk’ subsection of the ‘Risk Management’ section of the annual report.”

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