S3 Affected communities

S3 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 impacts, risks and opportunities (IROs) related to affected communities. For FMO, this specifically included communities that are potentially negatively impacted by the operations or activities of our customers directly and/or through their primary supply chains. For example, whilst a hydro power investment provides clean energy, it may require the resettlement of surrounding communities.

Within the scope of this topic, FMO distinguishes between different types of local communities that must be considered during the investment process. Given the countries we are active in, many of the communities that may be impacted by our customers’ operations are communities who belong to the bottom 40 percent of global income distribution and include groups who may be particularly vulnerable. These include marginalized groups such as rural populations, indigenous people and women.

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).

As a financial institution, FMO is expected to responsibly manage the potential negative impact on communities associated with our investments. We acknowledge that communities' economic, social, cultural, civil or political rights may be negatively impacted by inadequate practices by our customers with regard to, for example, land acquisition or potential resettlement, adequate housing, access to food, water and sanitation, and impact on their livelihood and/or cultural heritage. We note that our customers operate in countries where environmental and social (E&S) legislation may not be in line with international standards and/or in jurisdictions where their enforcement may be weak. This may increase the likelihood of negative impacts on local communities. This risk can be heightened for marginalized groups who may have limited access to mechanisms and structures that protect them (such as legal protection or lack of representation in local institutions).

Our linkage to the above negative impacts, and in particular potential linkage to the breach of the human rights of local communities by our customers in relation to the project/activity that FMO finances, may result in reputational risk, litigation risk and/or financial risk to FMO.

Our E&S risk categorization process is based on the likelihood of a negative impact occurring on local communities.

S3 Impacts, risks and opportunities

Based on our DMA, FMO has identified the following IROs related to the topic of local communities. The table gives an overview of how each IRO relates to the policies, actions and targets respectively.

Table 47. IROs and Policies and Actions and Targets

S3-1 Policies

Identifying and managing potential negative impacts on communities affected by our customers at an adequate level is embedded in FMO’s ESG management, which is part of our overarching Sustainability Policy. The ESG management procedures for screening and monitoring customers with regard to negative/adverse impacts on local communities are described in 'ESRS 2 - IRO management'. The following standards, which are part of FMO's ESG management, are relevant to addressing the potential negative impact on local communities:

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

• IFC Performance Standards (IFC PS) and related World Bank Environmental, Health, and Safety (EHS) Guidelines: The following standards are applied to manage negative impacts of our investments on local communities:
  
  

  • IFC PS1: Assessment and Management of Environmental and Social Risks and Impacts in relation to communities as well as disadvantaged and vulnerable groups.

  • IFC PS4: Community health, safety and security

  • IFC PS5: Land acquisition and involuntary resettlement

  • IFC PS7: Indigenous people

  • IFC PS3, 6 and 8 address impacts to communities indirectly

In practice, our ESG management process involves identifying, managing and monitoring potential and actual negative impacts related to local communities. Every investment is considered within a specific context with specific risks related to local communities. Every type of local community is potentially exposed to negative impacts. Our ESG management process is inherently designed to develop an understanding of specific contexts and specific type of communities per investment project and identify investments with greater risk of negative impact on local communities: this leads to the categorization of E&S risk, where additional measures are required for high-risk investments.

We expect our customers to consult with (IFC PS1) and establish a grievance mechanism (IFC PS1) for all local communities. Customers are expected to respond and facilitate the resolution of all grievances of local communities (IFC PS1) as well as assist and collaborate with these communities in cases of emergency where customer facilities are likely to generate impacts (IFC PS1).

FMO requires customers to evaluate and manage the risks of and impacts on the health and safety of the local communities during the project life cycle (IFC PS3) by: (i) considering safety risks to local communities in the design, construction, operation and decommissioning of structural elements (IFC PS3); (ii) avoiding or minimizing the potential for community exposure to hazardous materials (IFC PS3); (iii) avoiding and mitigating impacts on priority ecosystem services that may result in adverse health and safety risks (IFC PS3).

Furthermore, customers are required to avoid and minimize the displacement of communities by considering alternative project designs or, where avoidance is not possible, to provide compensation (IFC PS5) and improve, or restore, the livelihoods (IFC PS5), living conditions and standards of living of displaced persons (IFC PS5).

Moreover, in project locations where indigenous peoples are present, customers must identify and avoid negative impacts on these communities (IFC PS7) and where unavoidable, the negative impacts must be minimized and compensation must be provided in a culturally appropriate manner (IFC PS7). In these cases, customers must also establish and maintain an ongoing relationship based on Informed Consultation and Participation (ICP), with the community throughout the project’s life cycle (IFC PS7). In certain situations, such as when the project impacts critical cultural heritage or is located on traditionally owned land etc. (IFC PS7), it is necessary that the customer obtains Free, Prior, and Informed Consent (FPIC) from the community.

For higher-risk investments, and where applicable, customers are required to comply with the IFC PS 3, 6 and 8 which indirectly address affected communities reducing pollution and ensuring efficient resource use, minimizing harm to local health and environments (IFC PS3); safeguarding biodiversity and ensuring businesses preserve ecosystems that communities rely on for their livelihoods (IFC PS6); and protecting cultural heritage, and ensuring the development project  respects and engages with communities to avoid damage to culturally significant sites (IFC PS8).

Throughout the investment process and as part of our due diligence, we assess our customers’ performance against the above standards. The outcome of the assessment is an integral part of the financial proposals that inform our investment decisions.

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 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 (material) negative impacts on affected communities. (See 'ESRS 2 - IRO management')

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 risk and impact category and Human Rights context, as well as any substantiative rationale, are included as part of this disclosure. This allows (local) stakeholders, local communities, their representatives, 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 local communities are taken into account in our decision-making process and fosters 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, customers are contractually required to report on serious incidents (including incidents involving local communities) 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 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,

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

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 ensuring that effective measures are taken to reduce the risk of re-occurrence. We use the information to monitor the performance of our customers in managing their impacts on local communities. Numbers of fatalities is part of the information registered in the serious incident register, and is reported as a metric under S3.

No severe human rights issues and incidents were reported to FMO. 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 informed by the ICM, FMO’s human rights due diligence process, the Serious Incident Register, and ex-ante and ex-post disclosure questions as well as questions by external stakeholders such as NGOs, the media or parliament.

The IIMC, which is a sub-committee of the Non-Financial Risk Committee (NFRC), as appointed by the Management Board, monitors and advises upon designated projects, transactions, and customers on 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').

S3-2 Processes for engaging with affected communities

Ensuring sufficient engagement with local communities is an integral part of IFC PS1. As part of our due diligence, for high- and medium- E&S risk customers, we assess the extent to which our customers have engaged with and addressed the concerns of local communities.

In particular, for investments with negative impacts on local communities, the customer is expected to conduct an Informed Consultation and Participation (ICP) process (IFC PS1), which is an organized and iterative consultation with various members of the community to obtain their views on aspects of the investment that impact them directly (e.g. the proposed mitigation measures, the sharing of development benefits and opportunities, and implementation issues). The customer is required to incorporate the outcome of the consultation process into the project implementation plans.

The extent to which the perspective of vulnerable groups (such as indigenous peoples) has been considered is also assessed against the IFC PS. In line with the IFC PS, FMO applies heightened due diligence to any investment causing complex resettlement or affecting Indigenous Peoples, Critical Habitat or Critical Cultural Heritage. IFC PS1 include additional requirements in case indigenous people are impacted and informed consultation and participation with indigenous peoples throughout the project process is a core requirement of IFC PS7 and includes Free, Prior and Informed Consent under certain circumstances.

Additionally, FMO requires its customer to establish a stakeholder engagement approach and provide a grievance mechanism for local communities to raise their concerns. We perform site visits to assess and monitor our customers’ performance against the above requirements. When a financial proposal has been approved for an investment, FMO’s Customer Disclosure Policy provides an opportunity for the public (including local communities) to raise questions or concerns about the investment prior to contracting. Disclosures are provided in six languages. This allows various members and representatives of the local communities (e.g. religious leaders, local government representatives etc.), NGOs and CSOs to raise their concerns relating to the negative impacts of the investment.

S3-3 Processes to remediate negative impacts and channels to raise concerns

There are two channels in place through which local communities may raise complaints:

1. As part of the IFC PS, customers of FMO are required to make channels available to the local communities to receive and facilitate the resolution of concerns and grievances on E&S matters. In particular, customers are expected to have a grievance mechanism (IFC PS1) in place that is accessible to external stakeholders, follows a transparent and culturally appropriate consultative process, ensures confidentiality of complaints, and assures that stakeholders raising concerns will not be subject to retaliation or reprisal. The mechanism should not impede access to judicial or administrative remedies. As part of 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 and 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 take place, 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 ICM that allows external parties to file a complaint concerning investments or projects financed by FMO and this includes complaints on 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 allows members of the community to file a complaint with an independent expert panel (IEP). The ICM includes a non-retaliation statement to protect complainants when raising concerns. An approach of continuous improvement is applied and the ICM annual report describes the overall effectiveness of the mechanism, and the lessons learned (publicly). Policies and procedures are evaluated at least every four years. Currently, FMO does not assess whether local communities are aware of and trust these structures or processes (the ICM) as a way to raise their concerns or needs and have them addressed. Nonetheless, based on the community reach-outs received, we believe the current process is overall functioning effectively. 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).

S3-4 Key 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 local community-related topics (e.g. impact of hazardous materials on ecosystem services, degradation of natural resources, exposure to disease etc.). These improvements are translated into an ESAP that is incorporated into the 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 required to mitigate and possibly remediate the impact, this can be agreed with the customer. Performance gaps and specific actions taken in 2024 to address these gaps are described in the following table.

Table 48. Minimum Disclosure Requirements for Actions

S3-5 Targets

FMO currently has no targets related to affected communities. FMO’s 90 percent ESG performance target includes but is not limited to affected communities from related investments. Detailed information on this target is provided in 'ESRS 2 – IRO management'.

S3-5 Metrics

On an annual basis, FMO tracks community-related metrics. These metrics are related to our objective regarding preventing negative impacts on affected communities in general, as included in our ESG management and processes to remediate negative impacts and channels to raise concerns. Refer to 'ESRS 2 - Interests and views of stakeholders' for the disclosure on the new admissible complaints received through the ICM and 'S2-5 Metrics' for the disclosure on fatalities involving members of the public (affected communities).

FMO tracks the performance of high-risk customers against the requirements of the IFC PS in relation to local communities. The methodology used to determine this metric and any identified performance gaps for the year have been outlined in 'ESRS 2 - IRO management'.