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 2024. 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 that involves doing business in increased 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 the 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 Financial Risk Committee (FRC). The FRC is appointed by the Management Board 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 for the purpose of monitoring, challenging and deciding upon the execution of non-financial risk and strategic risk management within FMO.
Both the FRC and NFRC are chaired by the Chief Risk Officer (or Director Risk in her absence). Several sub-committees report into the FRC and NFRC, such as the Investment Committee, the Integrity and 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 the event 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 alongside the publication of the annual report. These documents fulfil the Pillar 3 disclosure requirements of the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR).
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/CRD on a consolidated basis.
Climate-related and environmental financial related risk
Climate-related and environmental financial risk is not a separate risk type but an external causal factor of FMO’s existing risk types. FMO defines climate-related and environmental financial risk as the risk of any negative financial impact on FMO stemming from the current or prospective impact of climate-related and environmental factors on FMO directly (e.g. on FMO’s own operations and policies regarding its aggregate investment portfolio) or indirectly, (e.g. through FMO’s customers and invested assets).
In 2021, FMO began a project to embed climate-related and environmental risks within the organization, based on the European Central Bank (ECB) Guide on Climate-Related and Environmental (C&E) Risks. Throughout 2024, FMO has reported quarterly portfolio scans to its Financial Risk Committee. The portfolio scan is an aggregated overview of climate-related risks in FMO’s investment portfolio (i.e. all loans and private equity exposures), and provides an initial assessment of climate-related risk exposures in industries and geographies, offering a view of risk concentrations in the portfolio. With regard to Transition risk, FMO has further developed its methodology for Policy and Legal and Reputational risks, while an approach to Market and Technology risk is actively being reviewed and refined.
In 2023, FMO developed an application to operationalize climate risk assessments as part of the investment process, which supports FMO's deal teams in carrying out the climate risk assessments step by step. As of the beginning of 2024, the application has been rolled out to investment departments, enabling improved data collection and granular identification of climate-related and environmental financial risks. FMO continues to work on improving the application using an iterative approach.
As part of our supervisory discussions, DNB has been assessing FMO’s progress in managing climate-related and environmental financial risks. In 2024, FMO conducted an additional materiality assessment and assessment on alignment with ECB C&E sub-expectations. DNB provided feedback and indicated that FMO has progressed in an adequate manner. DNB expects FMO to continue advancing with regard to the integration of climate-related and environmental financial risks within its risk management framework and strategy, with an expectation of reaching full compliance with the ECB Guide by 31 December 2025. FMO is also expected to periodically review, update and improve the C&E materiality assessment and to include the outcomes in its Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). Early 2025, FMO updated its materiality assessment and concluded that C&E financial risks are material to FMO’s investment risk (credit and equity), liquidity risk, strategic/business model risk and reputation risk over the short, medium and long term. Based on current insights and the profile of FMO, it also concluded that C&E financial risks do not pose a material risk for FMO’s market risk, business continuity risk or litigation risk across the different time horizons. FMO has mitigants in place for all its risk types to manage the risks within appetite.
Finally, FMO has continued to work on integrating climate risks into internal policies and procedures, and a Climate-Related and Environmental Financial Risk policy has been established and reviewed. For further information, please refer to the 'Sustainability Statement' chapter in FMO’s 2024 integrated annual report.
IFRS Reporting Requirement
Certain disclosures in this ‘Risk Management’ chapter 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-chapter to the end of the ‘Financial risk’ sub-chapter of the ‘Risk Management’ chapter of this annual report.