ESRS 2 Double materiality assessment

As part of our preparation for compliance with the CSRD, we conducted a double materiality assessment (DMA) in 2024, aligning with the requirements of the ESRS. The new DMA approach considers both impact materiality (inside-out) and financial materiality (outside-in), providing a more comprehensive evaluation of our impacts, risks and opportunities. This assessment marks a shift from our previous GRI-aligned materiality assessment, which focused solely on impact materiality. Building on our existing practice of assessing sustainability-related impacts, we broadened our scope this year to include sustainability-related risks and opportunities in the assessment.

Consistent with our established practice, we will continue to review our most significant sustainability-related IROs. This regular assessment ensures that our material sustainability-related matters remain relevant, allowing us to validate strategic decisions and align our work with evolving priorities. Our DMA assessment identified material sustainability-related impacts, risks and opportunities across FMO’s entire value chain, while considering stakeholder interests and views. The assessment resulted in a list of sustainability-related matters that are material for FMO, and are aligned at the sub-topical level covered by the topical ESRS.

ESRS terminology and definitions

In its sustainability statement, FMO has adopted the definition of impacts, risks and opportunities as prescribed by the ESRS. A sustainability-related matter is material from an impact perspective when it pertains to FMO’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium and long-term. This includes impacts connected to FMO’s own operations and upstream and downstream value chain, including through our products and services, as well as through business relationships. Most of the impacts identified through the DMA are in FMO’s downstream value chain.

A sustainability-related matter is material from a financial perspective if it generates risks or opportunities that affect (or could reasonably be expected to affect) FMO’s financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term. Whereas sustainability-related risks relate to negative financial effects, sustainability-related opportunities relate to positive financial effects arising from environmental, social or governance matters that may positively affect FMO. 

The way we manage on material impacts, risks and opportunities is further explained in section 'ESRS 2 – IRO management'.

Process and methodology

As a starting point for our DMA, we leveraged several existing activities and insights, as follows:

• Previous materiality assessments: we have been performing materiality assessments in line with the GRI Standards since the early 2000s. In 2023, we performed a comprehensive materiality assessment focusing on impact materiality, with the aim of bringing our approach closer to alignment with the CSRD. This assessment, presented in our 2023 annual report, considered both positive and negative as well as actual and potential impacts.

• Previous and ongoing stakeholder engagement: we drew on insights from stakeholder engagement conducted for the 2023 materiality assessment. This was complemented by numerous touchpoints with key stakeholders as part of regular stakeholder engagement activities.

• Investment portfolio insights: at the investment portfolio level, we gathered relevant insights into material ESG risks and stakeholder perspectives related to the ESG performance of our customers collected through our regular ESG impact management practices.

• Climate risk assessments: we incorporated findings from our climate risk assessments, conducted for our supervisor Dutch Central Bank (DNB) in 2023 and updated in Q1 2024, which provided insights into the materiality of climate-related risks.

Building on these insights, our DMA approach and methodology focused on three main phases:

1. From long list to short list: we narrowed down our long list of relevant sustainability-related matters to a shortlist, linking them to our value chain and investment portfolio.

2. Assessment and prioritization: we assessed and prioritized shortlisted sustainability-related matters, along with their related impacts, risks and opportunities. This process included updating our assessment methodology to better align with our internal risk management framework.

3. Validation and approval: FMO subject matter experts validated the results, after which the Management Board approved the final list of sustainability-related matters.

Phase 1. From long-list to short-list

The process began with the creation of a long list of potential material sustainability-related matters, informed by insights from internal and external sources, including standards like GRI, MSCI, peer reporting, sector trends, media analysis and internal documentation (e.g. E&S performance data, climate risk assessments, FMO’s 2030 Strategy, previous materiality assessments and related stakeholder input).

Using this foundation, we conducted multiple working sessions with FMO subject matter experts—such as impact and ESG officers, stakeholder engagement advisors, and (climate) risk management officers—to further refine the list. Internal and targeted external stakeholder input was then gathered to sharpen the definitions of impacts, risks, and opportunities, ensuring they accurately reflected both our business context and stakeholder expectations while also addressing any existing gaps.

Subsequently, we included stakeholder views in our assessment. This year, we primarily engaged with internal subject matter experts to evaluate our sustainability-related impacts, risks, and opportunities. To complement this, interviews and a survey involving both internal and external stakeholders were conducted as part of our 2023 impact assessment. These activities provided a valuable proxy for incorporating external stakeholder perspectives into our DMA.

FMO’s ongoing stakeholder dialogue with both corporate stakeholders and those at the investment level forms a strong foundation for understanding the interests and views of our key stakeholders. These continuous interactions also serve as a reliable proxy for identifying the impacts and risks that are most material to us. For more details, please refer to the section 'ESRS 2 - Interests and views of our stakeholders'.

More specifically, during this year’s DMA, we performed the following activities:

• Direct engagement with representatives from our main shareholders, the Dutch Ministry of Foreign Affairs and Ministry of Finance via a targeted interview. They confirmed that the current 2030 Strategy and the focus on SDG 8, 10 and 13 continues to be supported. This is in line with the results from FMO's previous impact materiality assessment.

• Targeted interviews with an FMO HR expert representing employees for validation and definition of employee-related IROs. Our employees continue to be passionate about our mission. In line with FMO's previous materiality assessment, working conditions, and equal treatment and opportunities for all remain important topics.

• An analysis of the input received from our existing stakeholder engagement activities, brought in via stakeholder engagement team members that have a good overview of the interests and views of our key stakeholders, including affected stakeholders.

• An analysis of E&S performance data. Perspectives of affected stakeholders (or rights-holders) in due diligence and engagement processes are included and reflected in this assessment data. Stakeholder and community engagement is a fundamental principle outlined in the IFC Performance Standards (IFC PS) that FMO applies during the selection and monitoring of investments.

• Desktop review of documents reflecting climate risk assessments and evaluation of losses and concerns within FMO’s loan portfolio related to sustainability matters.

Phase 2: Assessment and prioritization

The scope of our materiality assessment included our downstream investment portfolio, where, given our core investment activities, we expect most of FMO’s material sustainability-related matters to arise. To enhance the accuracy of the assessment, we evaluated our strategic investment sectors individually, recognizing that different sustainability-related matters are likely to be material within each of these sectors. Additionally, our assessment covered FMO’s own operations and our upstream business activities where we mostly focused on identifying opportunities for attracting and mobilizing funds and considered potential reputational and investment risks relevant for our shareholders and investors.

To determine which IROs from the shortlist were material to FMO, each was assessed using a scoring methodology aligned with the criteria of severity (scale, scope and irremediable character) for negative impacts, scale and scope for positive impacts, and likelihood for potential impacts as outlined by the ESRS. For risks and opportunities, the parameters of magnitude and likelihood were used.

The parameters of both impact and financial materiality scoring were defined leveraging FMO’s risk management framework which includes parameters for financial effects related to the severity of the consequences of a risk or opportunity. The FMO subject matter experts mentioned previously were involved in assessing these criteria and assigning scores. For impacts related to our investment portfolio, aggregated data from our ESG impact assessments was used to inform the scoring process. This ensured that actual risk exposure across all ESG topics monitored within our portfolio was considered in the materiality assessment.

Thresholds and outcome

To ultimately determine materiality, thresholds were applied to the impact, risk and opportunity scores based on FMO’s operational risk matrix and risk appetite statement. This matrix already has parameters in place for likelihood and magnitude to be able to indicate the severity of the consequences if a risk or opportunity were to arise, and these parameters were also used to assess impacts. Seven risk categories, plus a separate category for opportunities, were included, with consequences articulated ranging from trivial to extreme. FMO applied a higher financial materiality threshold to reflect the nature of FMO having a higher tolerance for risk. A higher score also reflects having stakeholders that require investments that are higher risk, have higher additionality and are more pioneering in nature, whilst limiting risk exposure to high reputational risks. Further substantiation of the materiality of the sustainability-related matters of water resources, pollution and circular economy was required, because the materiality of these matters could not be conclusively determined based on the scoring methodology alone.

Our DMA found an (inter)connection between the topics of water (withdrawals), climate change (adaptation), biodiversity (condition of ecosystems) and affected communities and also presented an overlap of water-related impacts and risks between these topics. Given the nature of our investments (agricultural practices) water-related impacts are to be expected. Considering FMO’s climate resilience ambitions and water withdrawals being a potential driver of biodiversity loss, it was decided to include the topic of water withdrawals as a material topic from an impact perspective.

The topic of pollution was also discussed by FMO experts and the FMO’s Impact and Sustainability Committee
(ISCO). Although FMO addresses potential pollution-related impacts through ESG activities, which require customers to uphold relevant (inter)national ESG standards, we assessed that within both our Agriculture sector and Energy sector the likelihood of a major pollution event is considered relatively low. Therefore, it was concluded that pollution is not a material sustainability-related matter for FMO.

Phase 3: Validation and approval

The final list of material sustainability-related matters was validated through FMO’s ISCO (for impact materiality) and the Financial Risk Committee (FRC) (for financial materiality). Both the impact and financial materiality assessments were approved by FMO’s Management Board.

The DMA identified eight sustainability-related topics as material for FMO covering impacts, risks and opportunities across three environmental topics, four social topics and one business conduct topic.

Table 2. FMO material sustainability-related matters

FMO recognizes that its ongoing due diligence and double materiality assessment process will evolve over time and possibly be impacted by the ESRS sector standards that will apply to FMO once adopted. The 'Sustainability statement' does not include every impact, risk and opportunity or additional entity-specific disclosure that each individual stakeholder (group) may consider important in its own assessment.

Detailed information on the material impacts, risks and opportunities related to FMO’s eight material sustainability-related matters, where they are concentrated in our value chain, time horizons and how these affect people or the environment is included in each topical chapter. Each chapter outlines how FMO responds to these impacts, risks and opportunities through our strategy and actions, and how they relate to our strategy, business model and business activities.