E1 Climate Change

E1 Introduction

In its 2030 Strategy and Climate Action Plan, FMO presents a set of ambitions, targets and actions to contribute to climate change mitigation and greenhouse gas (GHG) emission reduction. SDG 13 on Climate Change is one of the core components of our 2030 Strategy. An important component of FMO's climate ambition is that it contributes to a just and inclusive transition. We recognize that environmental and social objectives are inextricably linked. For FMO, this represents both the synergies and necessity of pursuing our core SDG goals SDGs 8 (Decent Work and Economic Growth), 10 (Reducing Inequalities), and 13 (Climate Action) together, if we are to be successful in contributing to any of them individually.

FMO acknowledges that climate change will undermine sustainable development goals if not urgently addressed. This implies that FMO’s customers (both current and new) might face new and never previously experienced risks from negative climate change consequences. The rise in weather and climate extremes has already led to some irreversible effects, while the preservation of ecosystems is essential for human well-being and the achievement of the SDGs. FMO recognizes that development finance is urgently needed to contribute to SDG 13, and to support an inclusive and just transition. FMO steers its investments towards those aiming at contributing to a positive impact towards SDG 13, such as investments related to climate adaptation, resilience and mitigation, while managing possible negative impacts.

E1 Impacts, risks and opportunities

Based on our double materiality assessment (DMA), we have identified the following impacts, risks and opportunities (IROs) related to the topic of climate change.

Table 14 Overview of how each IRO relates to the policies, actions and targets respectively.

FMO’s DMA, as described in 'ESRS 2 - Double materiality assessment', identified potential negative impacts through financed absolute emissions and potential positive impacts through investments in climate adaptation, climate mitigation and renewable energy as well as physical and transition risks. The Climate Risk Report and Climate Action Plan (CAP), both prepared in 2022, provided important input for determining FMO’s climate-related IROs.  

Impacts

Both positive and negative impacts take place downstream in our investment portfolio. The impact of our own operations or those of our upstream suppliers are not considered material because of the small scale of emissions compared to those in our portfolio.

The CAP describes how FMO actively monitors its activities and portfolio, thereby identifying actual and potential future GHG emission sources and other climate-related impacts within its operations and across its value chains. The intent of our data/ information collection drive is not only to use the information we gather for reporting and compliance purposes, but to actively manage our portfolio better, and to tailor our climate actions towards what is most effective. We will continue to work on improving our internal management and reporting systems to actively manage progress towards our sustainability goals.

As part of our ESG management process we uphold IFC Performance Standard 3 (IFC PS3) (addressing resource efficiency and pollution prevention), which includes minimizing the pollution from project activities. When project related emissions are potentially significant, FMO requires its customers to adopt measures (e.g. use of renewable energy sources, sustainable agricultural, the reduction of fugitive emissions, etc.) that avoid or reduce emissions in order to mitigate adverse impacts on the environment (IFC PS3). FMO requires that projects implement technically and financially feasible and cost-effective measures for integrating emission reduction into product design and operational processes (IFC PS3). Specifically, "this applies to the release of pollutants to air, water, and land due to routine, non-routine, and accidental circumstances with the potential for local, regional, and transboundary impacts." Transboundary pollutants include those covered under the Convention on Long-Range Transboundary Air Pollution, such VOCs that are key precursors in the formation of tropospheric ozone and particulate matter (of which black carbon is a significant component). This means that by upholding the IFC PS we indirectly screen investments for climate-related impacts, such as black carbon and tropospheric ozone.

FMO reports on financed absolute emissions in scopes 1, 2 and 3 in line with the GHG Protocol, as described in more detail in section 'E1-6 Gross Scope 1, 2, 3 and Total GHG emissions'. The financed absolute GHG emissions are reported in line with the Global GHG Accounting and Reporting Standard for the Financial Industry published by the Partnership for Carbon Accounting Financials (PCAF).

Although emissions from FMO operations are not considered material, we will continue to report scope 1 and 2 emissions to be able to present a full picture of our GHG emission footprint.

Risks & opportunities

The material climate-related risks and opportunities for FMO occur both upstream and downstream in the investment portfolio.

The climate-related risks identified in the DMA are aligned with internal risk assessment processes and documents. The assessment of climate risks happens on an ongoing basis at FMO. We run a portfolio scan on a quarterly basis that is reported to the Financial Risk Committee (FRC), which monitors our portfolio’s exposure to physical and transition risks. We also conduct materiality assessments which determine the potential for climate risk drivers to affect FMO’s portfolio or the entity itself. Both processes are discussed with the FRC. Furthermore, work is ongoing to embed climate risk assessments at the organizational level as well as within the investment cycle.

The regular climate risk assessments inform the Financial Risk team’s decisions. Scenarios are considered and factors are stressed in FMO’s Internal Capital and Liquidity Adequacy Assessment Processes (ICAAP and ILAAP), which are aligned with our regular Supervisory Review and Evaluation Process (SREP) cycle.

FMO’s physical climate risks were assessed over the current, medium and long-term using a high-emissions scenario and in line with guidelines from the Task Force on Climate-related Financial Disclosures and the ECB guide on Climate-related and Environmental Risks. While the climate risk assessment covers physical risks and transition risks, the various time horizons and high-emissions scenario were applied only to physical risks. FMO is currently working on further defining a methodology to assess transition risks that is suitable for the markets in which it operates.

The climate risks associated with FMO’s investment portfolio are also described in FMO’s first climate risk report, which, as mentioned above, are aligned with the climate-related risks identified in the DMA. This report was written in line with the Dutch Central Bank (DNB) requirements and shows that FMO’s portfolio is exposed to climate change risks, which will increase over time, with clear differences across locations, sectors and hazard types. This analysis, as well as those resulting from FMO’s ICAAP and ILAAP and continuous monitoring, served as input for the DMA, where additional transition risks (and opportunities) were identified.

The climate scenarios used are currently independent of the financial models, as FMO currently does not include climate-related assumptions in the financial models. FMO will explore assessing possible inclusion of climate-related risks in our financial models based on expected credit losses.

As part of our DMA, we identified a specific downstream (portfolio) risk related to water (E3) that we feel is better addressed under the risk of climate hazards here in E1: “There is a global risk of increased water scarcity due to climate change, increased water withdrawals and unsustainable water practices. This affects costs of production through higher water prices and leads to reduced crop yield and failure.” This is covered by the current climate hazards risk described in Table 14.

Physical risks

FMO plans to perform a physical risk assessment in line with the recommendations set out by the Task Force on Climate-related Financial Disclosures and the ECB guide on Climate-related and Environmental Risks (ECB, 2021). For this reason we have developed a C&E risk assessment tool that supports the identification and monitoring of C&E risks at the customer level. The tool currently focuses mainly on physical climate risks.

Various physical risks (flooding, temperature extremes, fire, water stress, drought, erosion, tropical cyclones and crop yield loss) are assessed based on a multiplication of hazard scores at specific locations or regions and sensitivity scores (specific to the sector/industry of the investment/business activity) to these hazards.

The climate-related physical hazards have been identified over current-, medium- and long-term time horizons. For the physical climate risks, current-, medium- and long-term time horizons have been defined as follows:

• Current-term: 2011-2040

• Medium-term: 2041-2070

• Long-term: 2071-2100

These time horizons are different from the time horizons specified by the ESRS. The time horizons used are in line with standard practice in the climate science community, where climate refers to the long-term weather pattern in a region, typically averaged over 30 years. In some cases, if the original data source did not overlap with these time horizons, the closest time period was chosen. The physical risk assessments are currently not tied to the lifetime of the exposure. Even if human-induced climate changes would not materialize in the near future under the climatological time horizon, foreseen changes may already affect investment decisions and other financial parameters today and therefore materialize earlier from a financial risk perspective, within the time horizons as specified by the ESRS.

The ICAAP assessments consider climate risks over a period of three years. Physical risks hazards are estimated to affect FMO’s customers in various locations and sectors to different extents, according to the climate risk assessment. The physical risks assessed in the climate risk assessments were summarized as one physical risk in the DMA.

The various physical risks for FMO’s relevant industries are assessed on an ongoing basis and reported through regular reviews within internal committees at portfolio level. To increase the granularity and understanding of these risks, FMO is currently in the process of rolling out physical climate risk assessments in the investment process, complementing the assessment at portfolio level as mentioned above.

The scores for physical hazards were created for both acute and chronic hazard types under a high emissions or worst-case climate scenario, which is the IPCC RCP 8.5 scenario. RCP 4.5 was also considered, but the projections from RCP 8.5 cover a greater range of climate conditions, especially for the long-term time horizon. Furthermore, the temperature and rainfall changes are more intense under RCP 8.5, and the long-term projections from RCP 4.5 are quite similar to the medium-term projection from RCP 8.5. In conclusion, RCP 8.5 covers a wider range of climate conditions (more extremes) for the risk assessment, so we believe this is the more appropriate choice, as it better covers potential risks and uncertainties.

RCP 8.5 makes the following assumptions about policies, macro-economic trends, energy usage and mix, and technology:

• Policy Assumptions: It assumes minimal or no additional climate policies beyond those already in place, leading to high GHG emissions.

• Macroeconomic Trends: The scenario includes assumptions about high population growth and relatively slow income growth.

• Energy Usage and Mix: It projects high energy demand with a continued reliance on fossil fuels, resulting in significant GHG emissions.

• Technology Assumptions: The scenario assumes modest rates of technological change and improvements in energy intensity, meaning that advancements in energy efficiency and low-carbon technologies are not sufficient to offset the high energy demand.

The scores for physical hazards were derived from climate models listed in the IPCC CMIP5 and CMIP6 protocols, where available. Each hazard was evaluated using a specifically chosen modeling method and simulated hazard exposure outputs from leading, peer-reviewed research institutions, and was further developed in partnership with well-known research institutions. The risk scores were created and standardized at an approximate 50x50 km spatial resolution as a level 1 detailed product. If grid location or country data was missing for an investment or loan, it was excluded from the analysis. Additionally, if the provided location data was not at least at the country level (e.g. listed as ‘Global’ or ‘Latin America’), it was also not included in the analysis.

Transition risks

Transition risks are described in FMO’s climate risk methodology. FMO is currently in the process of adjusting its transition risk methodology with a specific focus on considering how this risk can materialize and affect clients in unique ways based on the different markets where FMO invests. In addition, further developments are ongoing, for example:

• The Paris Alignment methodology was developed in 2023-2024, and it will apply to new investments after its implementation (as described in further detail in E1-3).

• ICAAP and ILAAP stress testing as described in 'E1 Resilience Analysis'.

The transition risks identified in the current assessment framework are focused on industry sensitivities. Additionally, transitional risks and opportunities were identified and scored as material during the DMA 2024 process due to the inputs from interviews and discussions with the project group.

We currently do not perform a climate transition risk assessment for new investments, but only at portfolio level. FMO evaluates its exposures to transition risk at portfolio level by considering industry sensitivities, as well as a range of specific energy technologies, various transition risk (drivers) and scale possible risk exposure from 1-5. These risks were taken as input for the DMA, which have been summarized into three transition risks, as presented in the overview table at the start of this section. 

The risks outlined in the (internal) climate risk assessment align with the risks identified by the DMA. The transition risk assessment at portfolio level analyzes the transition risks (policy and legal; technology-related; market-related and reputational risks) for the various sectors in our portfolio in more detail than the DMA provides.

Furthermore, our ICAAP 2022 includes information on the identification of transition events and assessment of exposure informed by climate-related scenario analysis. Our ICAAP from 2023 covers more detail on transition events, and an assessment of exposure based on the stress test assumptions for transition risk, where a disorderly transition is tested.

The transition risk assessments mentioned in the 2022 risk assessment are less mature than the physical risks. We are currently updating the transition risk assessment methodology. The transition risks are not yet linked to current-, medium- and long-term time horizons, and these horizons have not been yet defined (transition trends, however, have been linked to current-, medium- and long-term time horizons).  

We have finalized the methodology for Paris Alignment in 2024. This methodology will enable FMO to identify activities that are incompatible with, or need significant efforts to be compatible with, transition to an economy that is aligned with the climate goals in the Paris Agreement. New transactions will be assessed for alignment with the Paris Agreement goals once the methodology has been rolled out.

In the remainder of the E1 chapter, we describe the policies, actions, targets and decarbonization levers related to the IROs that were identified during the DMA, as well as FMO's resilience analysis.

E1 Resilience analysis

The section 'E1-IRO' describes the material climate-related risks, including whether they are classified as physical or transition risks.

To determine the resilience of both its investment portfolio and its own operations, FMO is required by the DNB to assess material risks under the Internal ICAAP and ILAAP through stress testing. FMO’s upstream value chain is not included in this resilience assessment and was also not found to be material by the DMA.

The ICAAP and ILAAP assessments are conducted every year, though the depth of the assessments differs depending on whether a SREP runs in a specific year. The frequency of the latter is decided upon by the DNB based on the risk profile of the institution but is typically done on an annual basis. The ICAAP and ILAAP assessments are aligned with FMO’s Risk Appetite Framework (RAF), which formulates the type and amount of risk that the bank is able and willing to accept in pursuit of its strategy.

The 2023 version of the ICAAP and ILAAP assessments was the latest one that was part of a SREP. Some additional analyses took place in Q1 of 2024 based on feedback from DNB.

Part of the input for the stress tests that were performed for this assessment cycle was based on a Climate Risk Analytics Methodology for FMO to identify material climate risks. Based on the assessment of physical risks by using this methodology, the countries and hazards with the highest severity and likelihood have been selected as input to the stress test. Transition risks have also been included, based on scenarios developed by the Network for Greening the Financial System (NGFS).

Based on the outcomes of the DMA, the focus of FMO’s climate-related risks is on its investment portfolio rather than its own operations or upstream value chain. All material risks as identified in DMA were already included in the materiality assessment underlying the ICAAP and ILAAP assessments.

The 2023 ICAAP and ILAAP assessments used 2022 as a base year to make a forecast for the period 2023 - 2025.The climate risk stress testing includes both physical and transition risks, based on established climate scenarios (IPCC, NGFS) to evaluate potential impact on FMO’s portfolio.

The ICAAP and ILAAP assessment use stress testing scenarios that include macroeconomic factors, such as currency fluctuations and market volatility. A ‘disorderly transition’ scenario to a low-carbon economy has been formulated with help of experts, which has been used to evaluate potential transitions risks for FMO. This scenario assumed 1) policy & legal risks in the form of carbon pricing, asset stranding, and rising insurance costs, 2) technology and innovation risks in the form of advancements in renewable energy and battery technologies, 3) market risks resulting from changing consumer and market sentiments, and 4) reputation risks resulting from adverse reputational impacts, such as changing perceptions of financing high-carbon activities.

The stress tests show that FMO is resilient to material climate risks. Both physical and transition risks under different scenarios have limited impact on liquidity and are within the risk appetite formulated by FMO. Additionally, FMO’s capital position remains adequate, and the excess capital remains robust under all circumstances simulated by the stress test scenarios. Specifically, the climate risks scenarios show that, despite the risks that are relevant for FMO and for the markets in which FMO operates, the impact on the capital position is estimated to remain limited.

There were several limitations to the resilience analysis. First, the definition of the physical climate risks used include the fact that the risk definitions are ex-ante and model based, do not include potential adaptation measures, and use a top-down, national level approach. Reliability for these types of risks was further limited by the use of proxy data to fill in data gaps, applying averages over long time-periods, and not including all potential hazards. Secondly, with regards to transition risks, the risk assessment is predominantly based on qualitative information, reducing its systemization and comparability, and not allowing for granularity (e.g., at country-level). While there are inherent uncertainties to climate change and society’s response to it, FMO continues to improve its methodology and run (stress) scenario analyses to capture plausible but severe scenarios for the institution.

As mentioned previously, the stress testing done for the resilience analysis is in line with FMO’s RAF. The RAF is monitored, managed and revised regularly to accommodate any market or organizational changes, and is reviewed by the Management Board and approved by the Supervisory Board on an annual basis. If necessary, it can be revised on a semi-annual basis in case of material developments. The outcomes of the ICAAP and ILAAP assessments are used to formulate possible strategic responses.

Climate- and environmental risks are inherently material to FMO’s business model & strategic risks, but this risk is also well managed by means of monitoring and reviewing of its business environment and strategic planning embedded within the organization and periodically reviewed with its stakeholders. Currently, the conclusion is that the risks to capital and liquidity related to climate change are well-managed by FMO and do not constitute a risk for the resilience of the business model.

In addition to monitoring and managing risks, FMO has a pro-active investment strategy that contributes to climate adaptation and mitigation worldwide, also specifically aiming to increase the resilience of its customers, by engaging actively with them to define climate adaptation solutions and providing technical assistance. How FMO implements this in practice will be elaborated on more in 'E1-3 Actions'. Through these actions, FMO not only aims to achieve a positive impact, but also increases resilience of the portfolio against both physical and transition risks.

E1 ESRS 2 GOV-3 Integration of sustainability-related performance in incentive schemes

As explained in 'ESRS 2 - Governance of sustainability matters', there is no direct relationship between sustainability-related elements, including climate, and remuneration elements in FMO's remuneration policy. Along with many other elements, climate-related performance only has an indirect effect on remuneration, even though it can contribute in part to individual annual performances.

E1-1 Transition plan for climate change mitigation

FMO does not have a formal transition plan, however, information included in this section is described in other relevant FMO documents.

Two sets of actions, directly contributing to climate change mitigation, can be classified as decarbonization levers, as per the ESRS definition:

1. Aligning our portfolio and investments with the Paris Agreement goals.

2. Increasing climate investments and support to our customers.

These levers are described in more detail in section 'E1-3 Actions and resources in relation to climate change policies'.

FMO has set a GHG emission reduction target: the Power Generation Emission Reduction Target. FMO aims to reduce emissions from financed scope 1 emissions in power generation by 50 percent in 2030. This target was developed using a 1.5°C pathway scenario (REMIND-MAgPIE 3.0-4.4, Scenario: Orderly - Net Zero 2050 scenario, electricity). More details on this target are provided in section 'E1-4 Targets related to climate change mitigation and adaptation'.

FMO has set the ambition in its 2030 Strategy to be Net Zero by 2050. In the short-term FMO will steer on aligning financial flows with 1.5°C aligned sectors and activities. FMO is also developing a Paris alignment methodology, based on internationally acknowledged guidelines and best practice. Over time, when data and methodologies have improved, FMO will use country- and sector-based 1.5°C pathways as guidance for the emission intensity requirements of its targets at portfolio and investments level. As a component of our climate action project workstream, we will continue to improve our data collection, including at the level of our customers, and use it to assess our progress.

FMO recognizes that climate objectives should be carefully balanced with customer- and/ or locationspecific social and environmental considerations, including the need for a just and inclusive transition and will further study how to treat potential tradeoffs in this regard. In addition, FMO invests in projects that contribute to GHG removals and storage, including forestry, and aims to grow forestry investments.

The significant operational expenditures (OpEx) in the form of internal and external staff required for the implementation of the decarbonization levers are provided in section 'E1-3 Actions and resources in relation to climate change policies', since they are aggregated for the implementation of the Climate Action Plan. The Climate Action Plan includes actions on both climate mitigation and adaptation.

There are no material capital expenditures (CapEx) in the form of investments in FMO's own operations associated with the transition plan, as explained further below and in the section 'ESRS 2 - Our sustainability reporting approach'.

FMO has no key (physical) assets in its own operations that materially contribute to climate change, nor do we sell any direct-use products. As such, no carbon lock-ins are expected to occur in the own operations of FMO under the definition provided in ESRS E1.

In relation to the application of the lock-in definition for investments in the investment portfolio, as of today FMO does not have a definition of carbon lock-ins related to investments. FMO may have carbon-intensive assets in its current portfolio, for example, via indirect investments through financial intermediaries in the Financial Institutions portfolio. However, mechanisms are in place to mitigate this risk in the investment portfolio. In this regard, a distinction between new and legacy investments should be made:

1. For new investments:

   • The Combined Position Statement on Coal and Phasing Out Fossil Fuels excludes and screens out investments that are expected to have a high risk for future carbon lock in.

   • FMO will use the Paris Alignment (PA) methodology to screen potential investments for alignment with the Paris Agreement. See section 'E1-3 Actions and resources in relation to climate change policies' for more background on the PA methodology.

2. While there may be carbon-intensive assets locked in, in the current portfolio, the Power Generation Emission Reduction Target applies to both new and existing investments, thereby ensuring that the total emissions from investments in power generation will be reduced by 50 percent in 2030. See section 'E1-4 Targets related to climate change mitigation and adaptation' for more information on the Power Generation target.

In its current form, the Commission Delegated Regulation (EU) 2021/2178, also known as the EU Taxonomy, is applicable for European economic activities. Since FMO invests outside Europe and entities based outside the EU are excluded from the numerator of the Green Asset Ratio (GAR), FMO reports a GAR of 0 percent. This implies that no key performance indicators from the EU Taxonomy can be linked to the resources required for the implementation of the actions described. More information is included in the 'EU Taxonomy' section.

Based on FMO’s interpretation of as investments in physical assets in scope 1 and 2 of an organization, there is no CapEx to be identified as material for FMO. As a financial institution, FMO does not do climate-related investments in physical assets in its own operations that can be considered material (see 'ESRS 2 - Double materiality assessment'). FMO is awaiting guidelines or sector standards specifically for financial institutions for possible adaptation of the CapEx definition to financial institutions.

FMO is not excluded from the EU Paris-aligned Benchmarks.

The decarbonization levers presented are based on FMO’s 2030 Strategy and the CAP, i.e. the aims and actions described are embedded in FMO’s strategy. This is explained in more detail in the chapter on 'E1 Impact, risks, opportunities'. Details on the progress of each of the decarbonization levers are provided in 'E1-3 Actions and resources in relation to climate change policies'. Details on the targets that are part of the decarbonization levers (e.g. the Power Generation Emissions Reduction target and €10 billion SDG 13 target) are provided in 'E1-4 Targets related to climate change mitigation and adaptation'.

The 2030 Strategy was approved by the Supervisory Board in 2022. The CAP was approved by the Management Board in 2022.

E1-2 Policies related to climate change mitigation and adaptation

Our material IROs related to climate change are covered in the following two policies.

1. Sustainability Policy

2. Climate Risk Policy

In the following sections, these policies are described in further detail. FMO’s commitments and actions on climate are described in the CAP and reported in 'E1-3 Actions'. All policies are subject to frequent revisions as per the Bank Risk Policy and are continuously evolving.

Sustainability Policy

FMO’s sustainability policy is mostly related to our (positive and negative) impacts and is described in more detail in 'ESRS 2 - IRO management'. The Sustainability Policy encompasses FMO’s organizational activities, including energy consumption, resource utilization, travel practices, and new investments, addressing all products offered by FMO. As such, our Sustainability Policy covers how we manage the climate-related impacts throughout our value chain. The Sustainability Policy is complemented by several position statements and an exclusion list. For climate change the most noteworthy include:

• Our Combined Position Statement on Coal and Position Statement on Phasing Out Fossil Fuels from our Investments reflects our approach to phasing out fossil fuels from our portfolio, both direct and indirect.

• Our Position Statement on Hydro Power Plants outlines our approach to investing in hydroelectric projects, emphasizing the balance between harnessing their economic and environmental benefits and rigorously assessing and mitigating potential technical and E&S impacts, including adherence to IFC PS and continuous monitoring.

• Our Position Statement on Impact and ESG for financial intermediaries outlines FMO’s structural approach to impact steering and ESG management in financial intermediary financing, including restricting our financial intermediary portfolio exposure to coal activities, and promoting and advising on green credit lines or green bonds that support climate action.

• Our exclusion list contains the activities, products, uses, distribution, business or trade that FMO and the borrower will not finance, extending to the borrowers’ shareholders, their affiliates and their subsidiaries.

Additional major documents and processes that explain how material climate positive and negative impacts are managed are:

• The Paris alignment methodology, which describes our methodology for checking our new investments for alignment with the Paris goals, thereby helping our clients with the transition to become Paris aligned.

• ESG in the investment process: While the Sustainability Policy explains FMO’s ESG management process, this is operationalized via different internal documents such as the Risk Appetite Framework, Investment Criteria, and SIS manual.

• The Green Label Guidelines are used to assess eligibility of new investments for a ‘Green Label’. A Green Label is assigned based on the ex-ante potential of an investment in terms of its positive impact on our portfolio, including for instance the reduction of greenhouse gas emissions, increasing resource efficiency, preserving and growing natural capital, and/or supporting climate adaptation. The label is not intended to monitor (ex post) impact. The Green Label thereby serves as a strategic steering tool and a proxy for FMO to measure progress against its €10 billion SDG 13 2030 target.

In relation to the upstream value chain, an additional relevant document is the Sustainability Bonds Framework, which addresses the four key pillars of the ICMA ESG Bond Principles. The framework explains how FMO attracts private or public funds by issuing sustainable or green bonds in the capital market. Moreover, FMO aims to mobilize public and private capital and to create new bankable opportunities, as described in our 2030 Strategy.

Climate Risk Policy

The Climate Risk Policy covers our climate-related risks in the entire value chain. Complementing this policy, the climate risk methodology explains how we identify the physical and transition risks associated with climate change.

All policies are subject to frequent revisions as per the Bank Risk Policy and are therefore continuously evolving.

The Climate Risk Policy aims to:

1. Define climate risk in terms of physical and transition risk drivers.

2. Introduce the approach used to identify climate risks in all FMO’s operations, products, and services.

3. Define the roles and responsibilities related to climate risk identification, assessment, and action.

Table 15. Minimum Disclosure Requirements for Climate Risk Policy

With regards to climate change mitigation, FMO manages material IROs through several processes. Most importantly, through our Green Label guidelines, with which we aim for our portfolio to materially contribute to climate mitigation, reduction of GHG emissions and/or increasing sequestration of GHG emissions from the atmosphere (along with adaptation and energy efficiency, as described below). FMO’s Green Label definition is based on the Common Principles for Climate Mitigation Finance Tracking, as defined by the Multilateral Development Banks. All Green-labelled investments should meet FMO’s Green Principles, namely that Green-labelled investments contribute to a genuine improvement and should not contribute to a long-term lock-in of high carbon infrastructure. A genuine improvement implies that 1) the improvement goes beyond the local regulatory requirements 2) the improvement is unrelated to local resources stress and 3) the improvement is sustainable throughout the value chain of an industry or a business. The implementation of our Paris Alignment methodology will contribute to further aligning our new investments to the Paris Agreement.

Furthermore, as per our combined Position Statement on Coal and Phasing Out Fossil Fuels, FMO will not invest in any upstream coal mining activities, transportation of coal, construction or renovation of a coal producing plant, or other associated business or infrastructure. Other fossil fuels are only invested in the exceptional case that a transition phase is deemed necessary to improve a country’s energy accessibility. The combined position statement applies to both direct and indirect investments of FMO.

The SBF sets out a list of climate change mitigation activities eligible for the sustainability bonds issued.

The Climate Risk Policy includes components such as knowledge and awareness development, embedding climate risk in the organization's strategy, governance, risk appetite determination, policy adjustments, stress testing, climate risk assessment methodology development, and internal and external reporting.

FMO manages its knowledge components and supports customers primarily via technical assistance. Investment teams are responsible for assessing climate risks and it is at their discretion to discuss the outcomes with clients. The Risk department maintains the methodology and supports knowledge development across the organization.

Besides climate mitigation, FMO also aims to contribute to climate adaptation. Most notably, we do this through our Green Label, through which we label those investments that ex ante are expected to positively contribute to climate adaptation. For a customer or an activity to be eligible for a Green Label in this category, it needs to be assessed to meet the climate adaptation principles set by the IFC-MDB joint methodology for climate change adaptation. This means that climate change adaptation is defined as achieving climate resilience outcomes in response to relevant climate change impacts, by managing or reducing physical climate risks, reducing the underlying causes of vulnerability and avoiding maladaptation.

Our Paris Alignment methodology further aims to ensure a minimum level of resilience for Paris alignment.

Our physical Climate Risk Assessment underpins our climate adaptation label analysis.

The SBF sets out a list of climate change adaptation activities eligible for the sustainability bonds.

Following the EDFI Statement on Climate and Energy Finance and as part of our Climate Action Plan, FMO aims to finance initiatives that contribute to adaptation and resilience to climate change, especially in respect of vulnerable communities and natural ecosystems.

Improving energy efficiency is one of the ways by which FMO strives to remain climate neutral in all its operational activities. FMO looks to build-up a portfolio that is targeted at improving access to basic services, such as energy, and aiming to optimally use scarce resources.

Energy efficiency is seen as a form of climate change mitigation when assessing activities according to the Green Label Guidelines: at least 20 percent reduction in energy consumption or GHG emissions is required for it to comply with that category. Through our E&S practices, we apply IFC PS3: Resource Efficiency and Pollution Prevention, which is specific for water and pollution (e.g. air, noise, water) related impacts and for opportunities on efficiencies (e.g. energy or water).

This also involves the issuance of sustainability bonds used to finance renewable energy and improve energy.

Regarding renewable energy deployment, following the EDFI Statement on Climate and Energy Finance, our Sustainability Policy states that FMO is committed to increase its share of investment that contributes to low-carbon, reliable and affordable energy. As described previously, through our Green Label and Position Statements, we aim to increase our portfolio’s share of contribution to renewable energy deployment and avoid investments in non-renewables respectively. Also, investing in renewable energy is central to our Energy sector strategy, which is one of the three core sectors in which FMO invests.

Finally, FMO aims to increase the volume of investments in biodiversity and forestry, to remove carbon and increase resilience. For further information please refer to 'E4 Biodiversity and Ecosystems'.

E1-3 Actions and resources in relation to climate change policies

The three main actions to operationalize FMO’s 2030 Strategy in relation to climate are as follows:

1. Aligning our portfolio and investments with the Paris Agreement goals.

2. Increasing climate investments and support to our customers.

3. Active management of our climate action.

Details regarding these actions are described in the following sections.

Aligning our portfolio and investments with the Paris Agreement goals

This action consists of the following sub-actions:

1. Reduce emissions in our investments, so that in 2050 our portfolio’s aggregate absolute emissions, when added with our carbon removal investments’ negative emissions, result in net zero emissions. We will strive to align the overall portfolio emission reductions with aggregate country- and sectorspecific 1.5ºC emission reduction pathways, taking into account a just and inclusive transition. At FMO we recognize that a starting point for Paris alignment are the Nationally Determined Contributions (NDCs) and National Adaptation Plans, and while we will seek to align our investments with these plans, we also seek to raise the ambition level of our customers and strive toward 1.5ºC pathway alignment.

2. Reduce power generation portfolio emissions by 50 percent to 2030, while at the same time approximately doubling our sustainable power generation portfolio and overall energy portfolio. We will consider additional targets in other parts of the portfolio.

3. Assess new investments for Paris alignment from a climate mitigation and resilience perspective, by implementing an investment-level Paris alignment assessment for new transactions.

4. Implement our commitment under the EDFI Climate and Energy Statement regarding fossil fuels in our indirect investments, and consider other policies that support our goals.

FMO has a dedicated project allocated to the implementation of this action. Since 2023, FMO has a dedicated workstream focused on developing a Paris alignment methodology and further developing our in-house capacity. In 2024 FMO finalized its Paris alignment methodology, based on the MDB Principles for Paris Alignment. This methodology will be used to assess new investments for Paris alignment from a mitigation and resilience perspective and was piloted in 2024 based on which the methodology was further refined and finalized. The Paris alignment assessment methodology will be rolled out in the coming period and once ready, will be used to assess new transactions.

Additionally, FMO will work further towards an approach for striving towards 1.5-degree alignment and develop climate mitigation KPIs for progress measurement.

The overall action can be classified as a decarbonization lever, since the sub-actions will reduce emissions in FMO's investment portfolio, thereby mitigating climate change.

The target of reducing power generation emissions by 50 percent in 2030 is part of this action. This target – together with performance on expected and achieved GHG reductions - is elaborated in section 'E1-4 Targets related to climate change mitigation and adaptation'.

Increasing climate investments and support to our customers

This action is made of by the following sub-actions:

1. Building up a portfolio of at least €10 billion dedicated to SDG 13 goals in climate mitigation, adaptation & resilience (including nature-based solutions), biodiversity, and other footprint reduction. We do this by engaging with customers such as our financial institutions to encourage their further investments in these objectives, through activities that contribute to developing our markets (market creation), and by mobilizing additional capital to closing the financing gap needed in emerging markets.
   
   

2. Increasing our climate mitigating investments and investments that contribute to solutions for adaptation, resilience and biodiversity, thereby strengthening our customers’ resilience to climate change. Examples of what this entails, include:

   • Corporate governance advisory work focused on climate governance and climate risk, building on the work we have done in this area to date.

   • Technical assistance funding, building on platforms like our Green Finance Framework. Engagement with portfolio companies and new customers to influence them to set targets and transition plans to reduce their emissions over time, or at a minimum to consider technical solutions together.

   • Supporting green finance innovation in our investments.

   • Active shareholdership by ensuring our investees are prepared for both climate risks and opportunities.

   • Creating coalitions with key nature conservation organizations, contributing to the understanding of the landscape approach, and promoting community and stakeholder engagement.
     
     

3. Provide sector-specific solutions for energy, financial institutions, and agriculture and forestry. Regarding energy, FMO will continue financing utility scale clean energy generation projects (solar, wind both on- and offshore, hydro power and geothermal), with an increased attention towards the least developed countries (LDCs) and fragile states. These efforts will be an important driver behind our climate mitigation and resilience goals. Towards 2030, through sector initiatives, partner engagement, and other means, we will work to remove bottlenecks currently slowing down the sustainable energy transition in some of our markets. We will also work toward sustainable energy access and inclusion, while further scaling both already established / proven and innovative technologies and solutions.
   
   For financial institutions, FMO will increasingly aim to have a ‘transformative’ impact on customers through a strategic approach including the development of product propositions, capabilities, and related financing with the goal of having the same effect on end beneficiaries.
   
   Finally, regarding agriculture and forestry, our focus will remain on strengthening local agricultural and food supply chains for both local or regional markets to increase local production and reduce reliance on imports, to improve local access to nutritious food, and to reduce food waste (e.g. through more and improved storage and distribution). We continue our focus on decent work and economic inclusion of the bottom 40 percent of income distribution, including smallholder farmers and women. Towards 2030, emphasis will be on engagement and investing more in global merchants, input providers and food companies with leverage to increase sustainable practices, along the (international) agricultural supply chains. We will continue expanding our integral/ landscape approach to supporting and investing in sustainable land-use and ecosystem protection and restoration, among others, through our work on forestry (carbon sequestration), climate smart and regenerative agriculture, soil improvements and livelihoods.
   
   

4. Continue to invest in carbon removals, specifically forestry, and help build these markets. More details on this are provided in the section 'E1-7 GHG Removals and GHG mitigation projects financed through carbon credits'.
   
   

5. Contribute to our impact portfolio growth objectives through our market creation efforts and scale our activities through our mobilization efforts. In order to advance our impact contributions (including for climate action), through ‘market creation’ we aim to develop unbankable opportunities into bankable projects, as well as drive topics and business models of the future. We aim to accelerate impact by upscaling mobilization of private and public capital by aiming to double this portfolio by 2030 through:

   • Developing climate fund propositions for large scale mobilization, following a just and inclusive transition approach, targeting both climate impact and social impact.

   • Blending public and commercial funding for high-impact propositions in LDCs. Exploring possibilities for equity mobilization.

   • Strengthening syndication efforts by increasing sourcing capacity of transactions, and by expanding and diversifying our investor base.
     
     

6. Engaging with our customers to increase their Paris alignment and provide them with technical assistance and other support. This will include helping to develop climate governance and climate risk frameworks and tools to work with their clients. We will specifically start with pan-regional customers as agents of change, gradually expanding to all customers over time.

FMO’s Green Label Methodology was updated in 2023 by the Sustainability Strategy and Policy team (established in 2023), following updated Multilateral Development Banks common principles for climate mitigation finance tracking. FMO has also established a Sustainable Finance Advisory team to support investment teams with Green deal origination. This team reached its full size at the end of 2023 and initiated work with the sectors in 2024.

On advancing sector-specific solutions for energy, financial institutions, and agriculture and forestry, in 2024, FMO developed a climate framework for Technical Assistance (TA) to the Private Equity and Agribusiness, Food and Water sectors. Through the climate framework, FMO is able to offer customers in the Private Equity and Agribusiness, Food and Water sectors TA on climate adaptation and mitigation. This includes climate awareness training, climate risk assessments, GHG measurement and reporting, climate action planning and implementation, climate opportunity origination, and compliance with sustainability standards.

As part of our ambition to continue to invest in carbon removals, specifically forestry, and help build these markets, FMO has investment officers specialized in forestry in various investment teams.

Under market creation, FMO has defined four focus themes: financial inclusion and resilience for entrepreneurs, responsible energy transition, forestry and sustainable land-use, and food system transformation. In 2024, we worked in particular on operationalizing and building out the financial inclusion theme.

The overall action can be classified as a decarbonization lever, since it will contribute to reducing emissions, thereby mitigating climate change. However, no GHG emission reduction target is linked to this action.

Active management of our climate action

This action is comprised of a set of sub-actions:

1. Monitor our work at a portfolio level, including absolute and relative emission levels. In order to achieve the impact we aim for, having the right data and additional information needed for measuring and steering our work will be key.

2. Continue to improve data quality and collection, including at the level of our customers. Data collection in our markets and for our specific customer types is not always readily available, especially for investments in smaller companies and for financial institutions and funds, which need to obtain data from their clients. To tackle this challenge, together with our development finance institution partners, we launched the Joint Impact Model (JIM) in 2021. The JIM allows us to model the emissions in the absence of emission data, to have an indication of our portfolio emissions.

3. Adopt an adaptive management approach and adjust our actions based on data and information. The intent of our data/information collection drive is to not only use the information we gather to report and for compliance purposes, but to also better actively manage our portfolio and tailor our climate actions to what is most effective. Moving forward, we will continue to work on improving our systems.

4. Implement a climate risk framework to manage the portfolio for both physical and transition climate risk. Integrating climate risk at FMO is about ensuring that risks to our portfolio due to climate change (physical and transition risks) are structurally identified, assessed, and managed. It is also about bringing this knowledge to our customers and structuring our transactions with the same considerations. Ultimately managing climate risk is another way to drive the change we want to see in our markets.

The implementation of this action is mainly covered via a project. In 2024, FMO made progress in developing transition and physical risk assessment methodologies for assessing climate risk. Physical risk assessment tooling is currently implemented for all sectors. Furthermore, FMO established a climate risk policy as well as a quarterly portfolio scan as part of the climate risk framework. FMO also continued work on improving data quality and collection. For the first time, FMO reported the PCAF score for the tracking of emissions data quality.

FMO will further work on transition risk assessment and improving data quality and management. FMO will also aim to refine emissions data to better take into account known use-of-proceeds instruments, i.e., when the investment is allocated to specific assets of a customer.

While this action aims to enhance FMO’s management of climate actions, such as creating more awareness via enhanced data and methodologies, the overall action cannot be classified as a decarbonization lever since it does not directly contribute to GHG reduction.

Table 16. Minimum Disclosure Requirement applicable for all presented actions

As explained in section 'E1-1 Transition plan for climate change mitigation', no key performance indicators from the EU Taxonomy can be linked to the resources required for the implementation of the actions described. More information is provided in the 'EU Taxonomy' section.

E1-4 Targets related to climate change mitigation and adaptation

FMO has two targets related to the Policies and Actions described in the sections 'E1-2 Policies related to climate change mitigation and adaptation' and 'E1-3 Actions and resources in relation to climate change policies' respectively. Table 14 presented in the 'E1 Impacts, risks and opportunities' section shows which target relates to which IRO, policy and/or action. The table, therefore, indicates for each action whether there is a related target, thereby specifying whether and how the effectiveness of these actions are quantitatively tracked.

Firstly, a GHG emission reduction target has been set in the form of the Power Generation Emission Reduction target. The target is set to reduce the financed scope 1 emissions in the power generation portfolio by 50 percent in 2030. Given the baseline value of 624 ktCO2e, this would imply an absolute reduction of 312 ktCO2e. This target will specifically contribute to reducing the financed absolute GHG emissions, i.e. the GHG emissions in scope 3 category 15 (Investments). The target has the same reporting boundary as the financed absolute GHG emissions. In 2024, the power generation portfolio emissions are 442 ktCO e, which is 42 percent of the financed scope 1 emissions and 8 percent of total financed absolute GHG emissions. In line with the ‘Financial Sector Climate Commitment Guideline on relevant financing, investments and action plans’ FMO has prioritized target setting for its power generation portfolio, being an emission-intensive sector.

Secondly, a strategic target has been set in the form of the €10 billion SDG 13 target. FMO aims to have developed a portfolio of at least €10 billion in investments dedicated to SDG 13 goals by 2030. An exante assessment is made to assess an investment’s potential impact and its related contribution to SDG 13, determining eligibility to receive the Green Label. The Green Label includes positive impact contributions to for instance climate change mitigation and adaptation and biodiversity. While it is no direct emission reduction target, the Green Label as a tool to steer towards FMO’s €10 billion SDG 13 target will contribute to reduced emissions in FMO’s investments portfolio and overall positive impact to SDG 13. Detailed information on this target is provided in 'ESRS 2 – IRO management'.

Since the Power Emission Reduction Target is the only target related to GHG emission reduction, disclosures requirements focusing on emission reductions are only applicable to this target.

Table 14 in the 'E1 Impact, risks and opportunities' section indicates to which IRO the Power Generation Emission Reduction Target and the €10 billion SDG 13 target relates to.

Table 17 provides information on the Power Generation Emission Reduction target, whereas the relevant details for the €10 billion SDG 13 target are presented in 'ESRS 2 - IRO management'.

Table 17. Minimum Disclosure Requirement for Power Generation Emission Reduction Target

FMO has set a GHG emission reduction target for financed scope 1 emissions in the power generation portfolio, as described in E1-4. While FMO aims to be net zero by 2050, FMO has not yet set other reduction targets for financed scope 1, 2 and 3, therefore no information and data can be provided regarding such targets. This is due to the many unknowns ahead including how climate change itself will evolve, how our markets and customers will respond, lack of data and what solutions are needed and effective. We seek to carefully balance our climate objectives with customer- or location-specific social and environmental considerations, including the need for a just and inclusive transition. FMO will focus in the short-term on striving to align financial flows with 1.5ºC aligned activities and is working on an approach to measure this. FMO will consider setting additional targets to further align financial flows. We will continue to improve our data collection, including at the level of our customers, and use it to assess and monitor our progress, as a component of our climate action project workstream.

The progress made regarding the Power Generation Reduction Emission Target has been disclosed in table 17. The baseline value is considered representative as there are no indications that for the power generation portfolio the activities covered and influences from external factors in the base year were significantly different to other years. Table 17 provides information on the scientific base used to define the Power Generation Emission Reduction Target.

Since no other targets for GHG emission reduction exist, no other progress can be disclosed, nor can information be provided on how it has been ensured that the baseline value of such targets is representative in terms of activities covered and influences from external factors.

The decarbonization levers of FMO are defined in the section ' E1-1 Transition plan for climate change mitigation'. The Power Generation Emission Reduction target is part of the lever ‘Aligning our portfolio and investments with the Paris Agreement goals’. Refer to table 17 for information on the quantitative contribution to GHG emission reduction and the definition of the target, for which one scenario has been used.

The €10 billion SDG 13 target is part of the decarbonization lever ‘Increasing climate investments and support to our customers’, supporting mitigation of and adaptation to climate change. Because of the nature of this target, no quantitative contribution to GHG emission reduction can be provided for this target. More details on how the decarbonization levers and targets relate is provided in table 14 in the 'E1 Impacts, risks and opportunities' section.

E1-6 Gross Scope 1, 2, 3 and Total GHG emissions

Table 18 provides the previous year and the reporting period's emissions. The previous year emissions were restated in line with our recalculation approach. The previously reported value for the total financed GHG absolute emissions (8,403 ktCO2e) was recalculated to 5,468 ktCO2e. The decrease is mainly due to the use of a new JIM version (3.1.6), which includes updated economic emissions factors based on an updated GTAP database. Compared to the restated previous year emissions, total GHG emissions increased in the reporting period mainly due to an extended methodological coverage for scope 3 category 15 GHG emissions (i.e. sector breakdown adjustments). For more details, please refer to the ‘FMO methodology for reporting financed GHG emissions and jobs’, available on FMO’s website.

Even though emissions in scope 1 and 2 from FMO’s own operations were found not to be material, these have been added for completeness and consistency with previously reported emissions. Milestones and targets have not been defined and are therefore left blank. FMO did set a target to reduce emissions in its power generation portfolio, which is described in section 'E1-4 Targets related to climate change mitigation and adaptation'.

The excluded scope 3 categories are indicated in the following table with ‘N/A’. These categories are excluded because they are not expected to be material for FMO. The upstream scope 3 categories 1-5 are not relevant as they only pertain to goods and serviced purchased for FMO’s one office building, scope 3 category 8 is not applicable as upstream leased assets (e.g. vehicles and building) are included under Scope 1 and 2, and the downstream scope 3 categories 9-14 are not applicable because FMO’s operations do not include sold physical products, downstream leased assets or franchises.

Table 18. Overview of total GHG emissions

The scope 1 and scope 2 emissions are calculated for the consolidated accounting group using the operational control approach. FMO does not have operational control over any investees that are not fully consolidated in the financial statements, such as associates, joint ventures and unconsolidated subsidiaries, and therefore exposures towards these entities are reported under scope 3 category 15.

The following graph shows the financed absolute emissions under scope 3 category 15 per strategic sector and emissions scope.

Figure 3. Financed absolute GHG emissions under scope 3 category 15 per strategic sector (in ktCO e)

Table 19a shows the total overview of financed emissions under scope 3 category 15. Table 19b disaggregates the financed emissions under scope 3 category 15 per strategic sector, funding source, product and emissions scope.

Table 19a. Overview of financed absolute emissions under scope 3 category 15 (totals)

Table 19b. Overview of financed emissions under scope 3 category 15 per strategic sector, funding source, product and emissions scope

No significant changes have taken place in the definition of what constitutes the reporting undertaking and its value chain. The financed emission calculations have benefitted from data improvements and methodological refinements compared to the previous Annual Report. The adjustments are elaborated upon in the FMO methodology for reporting financed GHG emissions and jobs, which is available on FMO’s website.

FMO follows the GHG Protocol Corporate Standard to report its GHG emissions scopes 1, 2 and 3. The absolute GHG emissions from FMO’s own operations are calculated based on measured data collected internally, such as information on commuting and flights and heating consumption of the FMO office in The Hague.

To report on the scope 3 category 15 emissions (i.e. the financed absolute GHG emissions), FMO follows the Global GHG Accounting and Reporting Standard for the Financial Industry published by the Partnership for Carbon Accounting Financials (PCAF).26 The reporting boundary includes the debt and equity portfolio at the time of reporting. The majority of FMO’s financed absolute GHG emissions are estimated through economic modelling using the Joint Impact Model (JIM). For more details, please refer to the FMO methodology for reporting financed GHG emissions and jobs, which is available on FMO’s website.

The JIM version used in this sustainability statement has not been externally validated. The upcoming JIM version is undergoing an external validation process, but the planned release of that version was not in time for this report.

Emissions are reported for the entire portfolio based on the actual results of the investments using the most recent data available. For the Annual Report 2024, this means that numbers reflect annual results of investments for 2024 to the extent that information is available, and otherwise 2023 (or older) numbers. Emissions are recorded per year. In other words, if the reporting date of the client is 31 March 2024, the data is reported for the year 2024 and similarly for customers where the reporting date is 31 December 2024. When investments are no longer in the portfolio as of 31 December 2024, we no longer include emissions of these customers.

Information about the percentage of different contractual instruments within scope 2 is not provided, since scope 2 emissions were found to be non-material by the DMA.

The percentage of financed emissions calculated using primary data is disclosed in table 19a and 19b. The tables also include information on the coverage percentage and the PCAF data quality score.

Biogenic emissions of CO2 from combustion or bio-degradation of biomass that occur in value chain are included in the gross scope 3 emissions, as data limitations do not allow to disclose these separately.

This is the first year that FMO reports on its GHG emissions per net revenue. As such, no comparative value or marginal change is provided in table 20. The net revenue figure was calculated by summing the line items 'Interest income from financial instruments measured at AC', 'Interest income from financial instruments measured at FVPL', 'Dividend income', 'Fee and commission income' and 'Remuneration for services rendered' from the financial statements (see 'Consolidated statement of profit or loss' in the 'Consolidated Financial Statements' chapter).

Table 20. GHG intensity per net revenue

E1-7 GHG Removals and GHG mitigation projects financed through carbon credits

In the downstream value chain, FMO invests in projects that contribute to GHG removals and storage. As per FMO’s 2030 Strategy, Climate Action Plan and Forestry Strategy, we will increase our contribution to GHG removals and storage, by investing more in, for example, forestry and nature-based solutions. For instance, FMO’s Forestry strategy was launched in 2023 and aims to grow investments in forestry, including nature-based solutions, sustainable natural forest management, and greenfield plantations. Projects that contribute to GHG removals and storage are moreover eligible for FMO’s Green Label.

FMO does not yet quantitatively report on emission removals through these activities. This is something that is being worked on for future reporting.

Even though operational emissions were found to not be material, FMO offsets its operational emissions from business travel by investing in a mix of different carbon credits. In 2024, FMO has offset 5,869 tonnes of CO2eq, using an equal split of VCS Punjab Agroforestry India credits and VCS Pichacay LFG Equador credits.

It should be noted that no carbon credits are used to claim emission reductions towards the Power Generation Emission Reduction Target. The offset emissions are also not deducted from the operational emissions reported in section 'E1-6 Gross Scope 1, 2, 3 and Total GHG emissions'. In other words, we report our gross operational emissions.

Within our own value chain, FMO invests in activities that contribute to carbon removals, including forestry investments. Currently, we are choosing to not quantitatively assess the GHG removals through our investment portfolio as we are still waiting on global standards to become clear before deciding on a sequestration tool/methodology. This includes, for example, the GHG Protocol on Land Sector and Removals Guidance (expected Q1 2025) and SBTi FINZ standard (expected Q1 2025).

The carbon credits FMO acquires are all retired on a yearly basis. These carbon credits do not originate from FMO's customers and are therefore outside FMO's value chain. FMO plans to keep offsetting its market-based operation emissions by purchasing carbon credits, but there are no contractual agreements for future purchase of carbon credits.

FMO has committed to be net-zero by 2050. Our plan is to achieve this by (1) reducing the emission intensity at portfolio and investment levels; and (2) increasing investments in carbon removals (primarily forestry), so that when all carbon equivalent emissions – positive and negative - are aggregated in 2050, our portfolio emissions are ‘net zero’. Pathways regarding these carbon removals are not developed yet, as elaborated on in section 'E1-1 Transition plan for climate change mitigation'. FMO will focus in the short-term on striving to align financial flows with 1.5ºC aligned activities and is working on an approach to measure this. FMO will consider setting additional targets on the alignment of financial flows. We will continue to improve our data collection, including at the level of our customers, and use it to assess our progress, as a component of our climate action workstream ahead.

FMO strives to remain climate neutral in all its operational activities, through energy efficiency, sustainable energy procurement and compensation through the use of carbon credits. FMO's operational emission neutralization initiative does not affect the set reduction targets because carbon credits or removals do not count as emission reductions. Moreover, FMO's material emissions take place in the downstream value chain. While FMO's operational emissions are not subject to an emission reduction target, they are considered part of its net zero ambition.

FMO entity specific metrics – climate change

In addition to ESRS-specific metrics on emissions, FMO reports on Green-labelled new investments and financed avoided GHG emissions.

Green-labelled new investments

The Green Label Guidelines provide criteria and a methodology to assess new investments for their eligibility for FMO’s Green Label. The Green Label is a strategic steering tool and a proxy for us to measure progress against the €10 billion SDG 13 target and includes, but is not limited, to climate change. The metric disclosure for Green-labelled total new investments is presented in 'ESRS 2 - IRO management'.

Financed avoided GHG emissions

Avoided emissions are the reduction in systemic emissions resulting from a project, product, or service compared to a counterfactual scenario. For example, this can be emissions avoided by renewable power production that is assumed to displace fossil fuel-based power plants, or emissions avoided through the protection of forests against illegal logging. The financed avoided GHG emissions metric aims to quantify our contributions to climate change mitigation activities. A significant proportion of avoided emissions was attributable to our debt and equity portfolios in on-grid renewable power projects. While this metric is not defined under the CSRD, financed avoided emissions is a key entity-specific metric for FMO and further defined in Table 21. Table 22 disaggregates the financed avoided emissions per strategic sector, funding source, product and project type.

Table 21. Minimum Disclosure Requirements for Metrics for Financed Avoided Emissions

Table 22. 2024 results on Financed Avoided Emissions