ESRS 2 Governance of sustainability matters
The topic of governance is mostly covered in the sub-chapter ‘Corporate governance’ and the chapter ‘Report of the Supervisory Board’. In this section, we provide information on the governance aspects relating to sustainability-related matters.
Roles and responsibilities in managing IROs
FMO’s sustainability agenda is managed in an integrated way. The Supervisory Board oversees the overall strategy and performance. The Supervisory Board has three dedicated committees: The Audit and Risk Committee (ARC), the Impact Committee (IC) and the Selection, Appointment and Remuneration (SARC). The Audit and Risk Committee provides - among others - advice to the Supervisory Board on approving the Risk Appetite Framework. The Audit and Risk committee also discusses the quarterly Risk Appetite Reports on a regular basis. This report includes sections on whether climate risk and ESG risk are within appetite level. The Impact Committee prepares the decision-making and advice of the Supervisory Board on FMO’s strategic impact commitments, including policies and targets related to sustainability-related matters.
Our material sustainability-related impacts, risks and opportunities are reflected in the standing rules of the Supervisory Board Impact Committee as part of their objective of assisting the Supervisory Board in overseeing the quality and integrity of FMO’s statements regarding development Impact. The Supervisory Board Impact Committee also prepares advice to support Supervisory Board and Management Board decision-making concerning FMO's strategy in respect to sustainability-related matters, including policies and target-setting.
Our Management Board is responsible for FMO’s mission, vision, strategic goals and strategy including our long-term value creation. The Management Board is also responsible for implementing the strategy and the subsequent delivery of results, as reflected in the standing rules of the Management Board. Our sustainability-related matters are closely connected to managing FMO’s development impact, which is a core Management Board responsibility. In 2022, the Management Board approved FMO’s 2030 Strategy, including its 2030 strategic targets and ambitions. FMO’s long-term strategy is translated into annual business plans, outlining the priorities as well as the annual targets for the year, which are discussed and approved by the Management Board. The Management Board also approves the overall outcome of FMO’s double materiality assessment and reporting approach.
Specific investments and divestments are discussed and/or approved by the Management Board. The Management Board decides and steers on strategic ambition levels regarding sustainability, through the setting of sustainability-related targets at corporate level, approving elements of our sustainability policy universe and guiding on items with high sustainability-related risks of reputational damage.
Management Board committees
The Management Board has delegated some of these responsibilities to its management committees. With regards to sustainability-related impacts, risks and opportunities, responsibilities have been delegated to the Impact and Sustainability Committee (ISCO), the Non-Financial Risk Committee (NFRC) and the Financial Risk Committee (FRC).
The ISCO supports the Management Board by driving the day-to-day impact and sustainability agenda through improved decision-making of sustainability-related matters and interpretation of external developments, with a view to implementation consequences. The Co-CIO has been appointed as the single point of accountability in the Management Board for sustainability-related matters and acts as Chair of the ISCO. In addition, the committee is composed of the following permanent members: Director Strategy, Director ESG+, Director Finance, Impact and Data, Investment Director and Director Credit and Special Operations. The ISCO endorses the results of the FMO’s double materiality assessment (DMA) from an impact materiality perspective, for the Management Board to approve. The Sustainability Policy is approved by the Management Board at least once every 3 years. The ISCO has delegated authority for its annual approval.
The NFRC is appointed by the Management Board as an independent body for the purpose of monitoring, challenging, and deciding upon the execution of non-financial risk within FMO including ESG risks and will decide on the escalation of unacceptable ESG risks related to investment projects and cases with high reputational risk. The FRC deals with ESG risk at a portfolio level including for example climate risk assessments and results. The FRC also endorses the results of the DMA from a financial materiality perspective. Both the FRC and NFRC are chaired by Management Board members.
Internal functions
The responsibility for managing sustainability-related impacts, risks and opportunities lies with several internal functions within FMO. The Strategy department is tasked with managing FMO’s corporate strategy and implementation, including defining the sustainability strategy and related policies. FMO’s strategic goals and objectives are cascaded down to the investment departments, which are supported by the respective Impact and ESG+ departments for managing impacts and opportunities. These departments are responsible for identifying the areas in which FMO can work with customers to minimize our negative impacts and optimize our development impacts, to build customer capabilities and for the integration of sustainable standards in our investment processes. The Credit department is responsible for performing an independent review of FMO’s impact assessments at an investment level. The Finance, Impact and Data department, together with the Strategy department, prepares periodic reports to monitor progress on our strategic goals and operational targets, from both a financial and impact perspective. These are discussed with the Management Board on a monthly, quarterly and annual basis. Other relevant sustainability-related developments can be brought to the Management Board’s or ISCO's attention when deemed necessary. For a description of the procedures to manage ESG risks and FMO’s risk management framework, please refer to the 'Risk management' chapter.
Skills and expertise
As an impact-driven development finance institution, operating in emerging markets, we deal with a diverse group of stakeholders and topics. The Management Board aims to have a diverse composition with respect to gender, education, experience and age as well as relevant knowledge, expertise and experience in the business areas in which FMO is active. This includes sustainability-related matters, which are core to FMO’s mission. Having an up-to-date understanding of the topic is important for all board members. The Management Board and Supervisory Board can rely on internal experts or hire external experts, should the topic in hand require it. Moreover, the Supervisory Board and Management Board follow a Lifelong Learning Plan where besides, for example, topics that are required by the Dutch Banking Code, sustainability-related matters are included from time to time. The knowledge and experience we have at Supervisory Board and Management Board level relates to FMOs development goals, which includes contributing to in particular SDGs 8, 10 and 13.
Sustainability-related matters addressed
The Management Board is informed and discusses progress on material sustainability-related impacts and opportunities on a quarterly basis via the Integrated Quarterly Reports. These reports are prepared by the Strategy department to enable the Management Board to monitor progress towards our strategy, including progress on this year’s three priorities: 1) growing impactful business, which among other things includes progress on investments related to SDGs 8, 10 and 13; 2) improving our capabilities; and 3) regulatory compliance, financial sustainability and risk management.
The Management Board discusses the Risk Appetite Report every quarter and assesses whether the ESG risk and climate risks are within risk-appetite levels. If this is not the case, the Management Board discusses ways to steer our portfolio back towards risk-appetite levels. With regard to the approval of policies that touch upon ESG and climate risk, the Management Board generally invites representatives of the departments involved to the meeting to discuss the pros and cons and thereafter decides whether to approve the proposed policy. The same goes for prospective investments that have an ESG, climate or sustainability-related element that poses a dilemma. In general, the representatives of the departments involved elaborate on their point of view. Thereafter, the Management Board takes a decision on whether to invest, sometimes subject to conditions.
The Supervisory Board Impact Committee acts as a sounding board for the Management Board with regard to sustainability-related matters. For information on the topics discussed by the Supervisory Board and its committees, refer to the 'Corporate governance' section.
For a list of impacts, risks and opportunities that were addressed by the Management Board, Supervisory Board or their relevant committees, refer to the section on impact, risk and opportunity management included in each topical standard.
Sustainability-related performance in incentive schemes
FMO's remuneration policy includes no direct relationship between sustainability-related elements such as the avoidance or reduction of GHG emissions and remuneration elements such as a pay-for-performance system in which the achievement of individual or team targets related to climate/emissions results in an (additional) reward element or benefits. Sustainability-related goals and ambitions, as stated in FMO's strategy, are translated into an annual corporate business plan and goals per department/team. The contribution to the annual performance related to these goals and ambitions is part of the annual performance and appraisal interviews. The specific individual contribution towards FMO's sustainability agenda varies greatly by role. Therefore, along with many other elements, while sustainability-related performance can contribute in part to individual annual performances, it only has an indirect effect on remuneration. Further information on FMO’s remuneration policy is provided in the sub-chapter ‘Corporate governance’ in the section ‘Aligned remuneration policies’.