S2 Workers in the value chain

S2 Introduction

The process of the double materiality assessment (DMA) has been described in detail in 'ESRS 2 - Double materiality assessment'. The DMA processes assessed the materiality of impact, risks and opportunities (IROs) related to workers in the value chain. For FMO, this specifically included workers who are employed by FMO’s customers directly and/or workers in the primary supply chains of our customers. For example, in the context of a dairy processor customer, workers in the value chain include the direct employees of that customer, as well as the smallholder farmers who supply the raw milk to that customer.

FMO distinguishes different vulnerable groups of workers that must be considered during the investment process. Given the countries we are active in, the jobs that we support are often for people who belong to the bottom 40 percent of global income distribution, including marginalized groups, rural populations and women working in our customer’s value chain. Marginalized groups are those with limited access to economic resources and opportunities due to attributes such as age, gender, disability, race, ethnicity, origin, or religion. Women - in particular - often face unique and disproportionate challenges and are at higher risk of being negatively impacted by the activities of our customers (e.g. gender-based violence).  

FMO promotes the development of the private sector in low- and middle-income countries, which supports job creation. FMO therefore has a positive employment impact, supporting job creation when we invest in private sector customers. By focusing on SME investments in particular, we channel our efforts towards labor intensive segments.

Furthermore, our investments may also have a positive impact on gender diversity and in particular on female workers employed by our customers. We actively promote job inclusiveness, by removing barriers to the employment of women and by targeting businesses that focus on the inclusion of women in their value chain. Furthermore, equity investments made by FMO often come with the right to nominate a Director to the Board. By nominating female nominee directors to be appointed on the board of investee companies, we positively contribute to gender diversity in the workforce of our investee companies.

As a financial institution, FMO is expected to responsibly manage the potential negative impact of our customers on their workers. We acknowledge that workers may be negatively impacted by inadequate practices of our customers with regards to labor standards and working conditions, workplace health and safety, protections of vulnerable groups and workers’ relationship with management. We note that our customers operate in countries where labor laws may not be in line with international standards and/or in jurisdictions where their enforcement may be weak. This may increase the risk of forced and child labor. This risk is heightened in the agricultural and energy sectors, which employ low-skilled and temporary labor. We have identified that the solar supply chain sector is particularly exposed to the risk of forced labor. As such, for all new transactions involving solar technology, additional information is required from the solar supplier to confirm that no forced labor was used in the production of various components (panels, modules etc.).

Our E&S risk categorization process is based on the likelihood of negatives impact occurring on our customers’ workers in their value chain.

S2 Impacts, risks and opportunities

Based on our DMA, and our ESG risk management expertise, FMO has identified the following impacts, risks and opportunities related to the topic of workers in the value chain. Table 41 gives an overview of how each IRO relates to the policies, actions and targets respectively.

Table 41. IROs and Policies and Actions and Targets

S2-1 Policies

Policies towards strengthened economic participation (supporting jobs)

FMO aims to allocate capital towards advancing economic participation through our financing of the private sector in emerging markets and we monitor the number of jobs supported through our investments. As part of our sustainability policy, we actively seek to achieve inclusive development, reaching the economically excluded, including people in the bottom 40 percent of income distribution.

Policies towards advanced gender equality (women in the labor market) 

FMO aims to contribute to gender equality through increased gender-lens investments to include women in the labor market and target businesses that specifically include women in their value chain. Our Sustainability Policy (including Gender Position Statement) describes our commitment to gender equality and to steering towards investments that have a positive impact on reducing inequalities, including gender inequality.

To operationalize this for all new investments, the Reducing Inequalities Label (RI Label) has been put in place to classify individual investments as per their intended impact and to steer towards specific impact objectives which can also be related to workers in the value chain.

The RI Label has several categories, including gender. Investment teams assess investments for opportunities to meet the label criteria and they can qualify under one or multiple categories. Investments that contribute to advancing gender equality, including through women in the workforce, is one such category.

The label is assigned based on the ex-ante potential to advance gender equality, which includes advancing women in the workforce, women as part of the value chain, and gender criteria such as governance of a gender strategy and women in management. Definitions and eligibility thresholds are based on inclusive growth practices of peer DFIs and other industry standards, however they are FMO-specific. The methodology to monitor gender lens investments is being reviewed.

See an example of a definition and related criteria below.

Table 42. Gender Smart Energy company

Equity investments made by FMO often come with the right to nominate a Director to the Board. FMO has committed that a third of all Nominee Directors appointed per year to serve on the board of an investee company will be female. This target was set with the aim of improving gender balance in the number of Nominee Directors by 2030.

Policies towards preventing inadequate working conditions

Identifying and managing potential negative impacts on our customers’ workers at an adequate level is embedded in FMO’s ESG management process. The ESG management procedures for screening and monitoring clients with regard to negative impacts on workers in the supply chain are described in 'ESRS 2 - IRO management'. The following standards are relevant to address the potential negative impact on our customers’ workers:

• FMO is committed to acting consistently with the International Bill of Human Rights, the International Labor Organization Declaration on Fundamental Principles and Rights at Work, the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights.

• IFC Performance Standard 2 (PS2): The requirements set out in this Performance Standard have been in part guided by a number of international conventions29 and instruments, including those of the International Labor Organization (ILO) and the United Nations (UN).

In practice, our ESG management process involves identifying, managing and monitoring potential and actual negative impacts related to workers in the value chain of our customers. Every investment is considered in a specific context with specific risks related to specific value chain workers. Every type of worker is potentially exposed to negative impacts. Our ESG management process is therefore inherently designed to develop an understanding of specific contexts and specific type of workers per investment project and to identify investments with a greater likelihood of negative impact on workers.

We expect our customers to treat all workers fairly (IFC PS2), establish or maintain worker-management relationship (IFC PS2), provide safe and healthy working conditions (IFC PS2), promote compliance with labor laws, protect vulnerable workers, avoid the use of child or forced labor (IFC PS2), and identify and remediate risks in their primary supply chains (IFC PS2), recognizing that we work in regions with weak regulations and in sectors relying heavily on subcontracting (IFC PS2).

IFC PS1 and 2 address gender equality in the value chain, namely capturing men and women’s views on impacts, concerns and priorities (IFC PS1), and ensuring non-discrimination and equal employment opportunities and the occupational health and safety of both men and women (IFC PS2).

IFC PS2 explicitly addresses child labor, forced and compulsory labor and trafficked persons. This standard applies to workers directly engaged by the customer (direct workers), workers engaged through third parties to perform work related to core business processes of the project for a substantial duration (contracted workers), as well as workers engaged by the customer’s primary suppliers (supply chain workers).

Throughout the investment process and as part of our due diligence, for high E&S risk investments we assess our customers’ performance against the above standards. The outcome of the assessment is part of the financial proposals that inform our investment decisions.

In cases where negative impacts or gaps in the management of such negative impacts are identified, FMO agrees with the customer on measures and actions to be taken by the customer to close these performance gaps. These actions are formalized in an Environmental and Social Action Plan (ESAP) which is included in the financing contract with the customer. By collaborating with our customers, we aim to address these gaps in order to effectively manage associated negative impacts on workers in our customers’ value chain.

As per FMO’s Customer Disclosure Policy, FMO publicly discloses the proposed investment on the World Map page of the FMO website upon approval of an investment, but before finalizing any financing contract. Information relating to the investment, such as the countries where operations take place, sector(s), funding objective, E&S (Environmental and Social) impact and Human Rights context, as well as any substantive rationale, are included as part of this disclosure. This allows (local) stakeholders including workers, worker representatives such as labor unions, NGOs and CSOs, and others to raise concerns and enables FMO to make more informed decisions that improve the quality of the investment. This process ensures that the perspectives of impacted workers of our customers’ value chain are taken into account in our decision-making process and supports a collaborative approach in FMO’s investment activities.

Customers contractually undertake action to comply with E&S requirements which include the IFC PS (and other requirements as described above) and to respect human rights. In addition, our customers are also contractually required to report on serious incidents (including incidents involving their workers and contractors) occurring on or nearby any site, plant, equipment or facility of the customer as soon as these occur, including those that may impact human rights. 

We have developed a Serious Incident Register where we register and track serious incidents. We have defined serious incidents as the occurrence of events that interrupt normal procedures related to:

• Investments, customers, projects, affected people, processes and systems and,

• FMO (E&S) standards (as described above for workers).

Where the underlying cause of the incident is unknown, FMO ensures that a meaningful root cause analysis is conducted on incidents and, where required, corrective action is implemented. Follow-up actions are monitored, which is crucial to ensure that effective measures are taken to reduce the chance of re-occurrence. We use the information to monitor the performance of our customers in managing their impacts on value chain workers. Numbers of fatalities is part of the information registered in the serious incident register, and is reported as a metric under S2. However, the risk remains that some incidents may not have been reported to us and have, therefore, not been included in these numbers. 

No severe human rights issues and incidents were reported to FMO through the ICM or the Integrity and Issue Management Committee (IIMC). The IIMC is a sub-committee of the Non-Financial Risk Committee (NFRC), appointed by the Management Board. It monitors and advises upon designated projects, transactions and customers at a corporate and project level, including, where applicable, complaints related matters brought forward via the Independent Complaints Mechanism (ICM), for proposed, active and completed/exited investments (see 'ESRS 2 - Interests and views of stakeholders'). With regards to the occurrence of human rights issues and incidents, the IIMC is informed by the ICM, FMO’s human rights due diligence process, Serious Incident Register, ex-ante and ex-post disclosure questions as well as questions from external stakeholders like NGOs, the media or parliament. 

S2-2 Processes for engaging with value chain workers

Ensuring sufficient engagement with value chain workers is part of IFC PS2. As part of our due diligence for all high and medium risk customers, we assess the extent to which our customers have engaged and addressed the concerns of their workers. In the same process, the extent to which the perspective of vulnerable workers (e.g. migrant workers, women etc.) has been considered by our customer is also assessed against the IFC PS2. Additionally, FMO requires its customers to provide a grievance mechanism for workers to raise their concerns. 

We perform periodic site visits to assess and monitor our customer’s performance against the above requirements. On an ad-hoc basis we also engage with value chain workers as part of our monitoring. When an investment has been approved, FMO’s Disclosure Policy provides an opportunity for the public (including workers) to raise questions or concerns about the investments prior to contracting.

Disclosures are provided in six languages. This allows labor unions, worker representatives, NGOs and CSOs to raise concerns relating to the negative impacts of the investment on workers. By enabling these stakeholders to raise concerns, we take into account the perspective of impacted stakeholders in our investment decisions; this can enhance the design and implementation of projects. 

S2-3 Processes to remediate negative impacts and channels to raise concerns

There are three channels in place through which value chain workers may raise complaints:

1. As part of the IFC PS, customers of FMO are required to make channels available for their workers to raise concerns or needs directly and have them addressed. In particular, customers are expected to have a grievance mechanism (IFC PS2) in place that is accessible to public/external stakeholders, follows a transparent process, ensures confidentiality of complaints and assures that stakeholders raising concerns will not be subject to retaliation or reprisal. Through our due diligence process, depending on the type of customer and E&S risk category, the customer’s grievance mechanism is assessed against the requirements of the IFC PS (e.g. number and frequency of complaints, whether these have been resolved, how, etc.). Access to remedy is provided by our customer in cases where an incident has occurred. This can take various forms, such as (in random order) financial compensation, public apologies, restitution, or rehabilitation, depending on the needs of the affected communities. Where incidents occur, a corrective action plan may be agreed with our customer to mitigate and possibly remediate the impact.
   
   

2. In addition to this, FMO has an Independent Complaints Mechanism (ICM) that allows external parties to file a complaint concerning investments or projects financed by FMO, and this includes complaints about ESG aspects. The ICM ensures the right to be heard for complainants who feel affected by an FMO-financed operation, facilitating dispute resolution and assisting FMO in drawing lessons learned. The ICM includes a non-retaliation statement to protect complainants when raising concerns and, applies an approach of continuous improvement and the ICM annual report describes the overall effectiveness of the mechanism, and the lessons learned (publicly). The ICM policy and procedures are evaluated at least every four years. If a complaint has been declared admissible, the Independent Expert Panel will launch a preliminary review into the issue(s) raised by the complainant. Based on the preliminary review and in consultation with relevant parties, the Independent Expert Panel will either conduct a ‘compliance review’ or, when all parties are willing to participate in such a process, facilitate a ‘dispute resolution’ process. The monitoring role in ‘dispute resolution’ is determined on a case-by-case basis. Any agreements reached by the parties involved will usually contain a mutually agreed program with timelines for implementation as well as roles and responsibilities to monitor the progress made. A ‘compliance review’ is the process to determine whether FMO has complied with applicable FMO policies. The Independent Expert Panel will launch a full inquiry into the issue(s) raised by the complainant and prepare a final report that is discussed with FMO’s Management Board and submitted to the Supervisory Board for disclosure. In cases where material non-compliances are identified, the ICM will monitor the situation until actions taken by FMO assure the ICM that FMO is addressing the material non-compliance(s).
   
   

3. Moreover, to report an irregularity, FMO provides a procedure that allows third parties, including value chain workers to report issues anonymously. The procedure for reporting suspicions is outlined in the Speak Up Policy which is available to value chain workers. For more information, refer to the Speak Up Policy and procedure.

Currently, FMO does not assess whether value chain workers are aware of and trust the structures or processes of the ICM as a way to raise their concerns. Nonetheless, given the number of requests we receive we believe the current process is overall functioning effectively.

The Minimum Disclosure Requirements for the ICM Policy are included in 'ESRS 2 – Strategy, business model and value chain'.

S2-4 Key actions

General actions

As part of FMO’s due diligence process, we identify performance gaps against our standards, and we agree with our customers on improvements that are required in relation to workers in our customers’ value chains (e.g. working conditions, occupational health and safety etc.). These improvements are translated into an environmental and social action plan (ESAP) that is incorporated into the financing contract.

The ESAP also stipulates timelines for the customers to close the action. Compliance against the ESAP and closing of actions is monitored as part of the customer credit review process which takes place annually. Where incidents take place, a corrective action plan may be agreed with our customer to mitigate and possibly remediate the impact. Performance gaps and specific actions taken in 2024 to address these gaps are described in the metric tables (see 'ESRS 2 - IRO management').

Specific initiatives in 2024

In 2024 we identified an increased potential negative impact on safety in the power distribution sector that directly impacts our customer performance against IFC PS2. As such, we co-developed an electric power and distribution health and safety toolkit to raise awareness and support customers in improving the safety of workers and local communities around network equipment and electrical distribution infrastructure.

Table 43. Minimum Disclosure Requirements for Actions

S2-5 Targets

FMO has not set a measurable target for impacts related to (value chain) workers. However, FMO does monitor the impact of our investments (see 'ESRS 2 - IRO management') related to workers. FMO’s 90 percent ESG performance target includes, but is not limited to, investments with risks related to workers in the value chain.

S2-5 Metrics

On an annual basis, FMO tracks entity-specific metrics related to workers disclosed in the table below. These metrics relate to monitoring our objective regarding positive impact, as well as our commitment to protecting value chain workers in general, as included in our ESG management processes to monitor negative impacts and channels for raising concerns. We report on the number of direct jobs supported, number of direct jobs supported for women and number of customers with E&S performance gaps in portfolio.

FMO tracks the performance of high-risk customers against the requirements of the IFC PS in relation to the treatment of workers in the value chain. The methodology used to determine the number of customers with E&S performance gaps in the portfolio, and any identified performance gaps for the year have been outlined in 'ESRS 2 - IRO management'.

Table 44. Minimum Disclosure Requirements for Metrics for the number of direct jobs supported

Table 45. Minimum Disclosure Requirements for the number of direct jobs supported for women

Table 46. Minimum Disclosure Requirements for the number of fatalities