External environment

A series of global and regional trends continued to shape our markets and strategic decision-making in 2025. Geopolitical fragmentation, economic uncertainty, climate disruption, and technological acceleration placed sustained pressure on the international system. For FMO, this dynamic environment presented a complex mix of challenges and opportunities.

At the same time, this landscape also gave rise to targeted forms of cooperation and innovation, particularly where shared challenges demanded collective solutions. From climate and transition finance partnerships to digital inclusion initiatives, collaboration emerged as a critical response to volatility. Within this environment, FMO’s customers demonstrated exceptional resilience, adapting to shifting market conditions and sustainability expectations.

True to its mission, FMO maintained its course to increase impactful investments in developing markets, enabling entrepreneurs to drive inclusive and sustainable prosperity. This chapter provides a high-level overview of the external environment in which FMO operated in 2025 and outlines the key global trends influencing stability, economic growth and sustainable development. Further details on our performance in this context are described in the chapter ‘Performance against our strategy’.

Global trends affecting our markets

Persistent geopolitical tensions and instability

Geopolitical tensions remained elevated throughout 2025, resulting in significant loss of life and widespread human suffering, particularly among civilians displaced from their homes or caught in the crossfire.

Among the many conflicts, developments in the Middle East continued to draw significant international attention. A short, armed confrontation between Israel and Iran in June, with involvement of the United States, raised concerns about broader regional instability beyond the Israel-Gaza conflict. In October, a ceasefire agreement between Israel and Hamas led to a pause in hostilities, after which Houthi groups halted attacks on Israel and vessels in the Red Sea. Nevertheless, conditions across the region remained fragile.

Meanwhile in Europe, the war in Ukraine continued for a fourth year, with efforts to resolve the conflict remaining unsuccessful. The situation continued to be a key geopolitical factor shaping global alliances.

Tensions increased across Asia. Fighting erupted between India and Pakistan in May, following a major terrorist attack in Indian-controlled Kashmir, though a ceasefire was reached after three days. A long-standing border dispute between Thailand and Cambodia flared into an open conflict in July, displacing thousands of people. Although a peace agreement was signed in October, tensions and sporadic violence persisted. Meanwhile, the civil war and humanitarian crisis in Myanmar continued, with ethnic minorities and militias battling the military junta across the country. Tensions between China and Taiwan remained high, although no major escalation occurred.

In Africa, instability persisted in several countries. The conflict in Sudan continued, triggering a humanitarian crisis with over 10 million people internally displaced and tens of millions facing acute hunger. Parts of the Horn of Africa and the Sahel remained affected by insecurity and the presence of armed groups. In the Great Lakes region, ongoing tensions in eastern Democratic Republic of Congo (DRC) and friction between the DRC and Rwanda heightened regional risks. Disputes over shared resources, including between Egypt and Ethiopia, also continued. These dynamics have heightened regional uncertainty.

The developments described above underscore persistent geopolitical risks affecting economic stability and investment conditions. In light of these dynamics, we launched a pilot to improve our conflict sensitivity and contextual risk awareness when investing in fragile contexts. We continue to monitor global developments closely, to ensure sound risk management and support our customers, within our mandate, in navigating these complex environments.

Resilience amid global headwinds

The global economy faced headwinds from rising protectionism, including new trade measures in several major economies. These developments disrupted supply chains, especially in the first half of the year. Trade flows slowed as markets expected a major economic downturn,1 yet the deceleration proved less severe than anticipated, with global GDP growth estimated to contract slightly from 3.3 percent in 2024 to 3.2 percent in 2025.2

Despite elevated uncertainty, we saw clear signs of resilience in the markets we serve. Inflation eased in many economies, allowing central banks to adopt more accommodative monetary policies. Employment and consumer spending remained robust across several key regions, supporting growth. Continued advancements in technological innovation offered new avenues for investment and development, particularly in renewable energy.

Looking at regional trends, Asia remained the fastest growing region globally, driven by India’s 6.6 percent growth and China’s 4.8 percent growth for 2025. Latin America experienced a more modest 2.4 percent growth, supported by recovering trade and commodity prices. Sub-Saharan Africa’s growth remained at 4.1 percent.3

Easing conditions in global financial markets

After a rapid tightening cycle, major central banks began cautiously easing policy rates as inflation pressures moderated, contributing to gradual improvement of global liquidity conditions.

Shifts in global financial and commodity markets influenced investment trends throughout 2025. Financial conditions improved significantly from the spring onward, supported by stronger investor confidence, rising stock markets, and recent policy rate cuts by the U.S. Federal Reserve. The resulting depreciation of the U.S. dollar against major currencies and decline in long-term interest rates improved financing conditions for emerging markets, facilitating a rebound in foreign-currency bond issuance.

Technological changes and the impact of Artificial Intelligence

Across the Agribusiness, Food & Forestry, Energy, and Financial Institutions sectors, demand for financing is increasingly shaped by customers’ efforts to adopt AI and digital technologies. In agribusiness, financing needs are rising as larger companies, SMEs, and smallholders seek capital and advisory support to strengthen data capabilities and adopt productivity‑enhancing tools, though uptake varies between digitally connected farms and underserved producers. In the energy sector, developers and innovators are driving strong demand for core financing as renewable projects scale and as companies invest in digital infrastructure, AI‑enabled performance improvements, and advisory services linked to grid and data readiness. Financial institutions are similarly expanding their demand for capital and advisory support as banks and fintechs scale AI‑enabled channels, enhance regulatory alignment, and strengthen cybersecurity. Across all three sectors, traditional debt‑financed clients tend to focus on incremental digital upgrades, while equity‑backed innovators are generating faster‑growing demand for more advanced, AI‑linked financial solutions.

Election results exerting pressure on sustainable development financing

While 2025 saw fewer national elections than the previous year, electoral outcomes in several advanced economies led to policy shifts with implications for global markets and development cooperation. Foreign aid budgets in a number of countries came under pressure, driven in part by increased defense spending, a stronger emphasis on domestic priorities, and slower economic growth.4

In the Netherlands, the general election held in October 2025 resulted in a fragmented parliament and coalition negotiations.5 The subsequent coalition agreement reaffirmed the Netherlands' commitment to international cooperation, including additional allocations for Official Development Assistance (ODA) and strengthened support for Dutch diplomatic representation abroad.

In the United States, a presidential order freezing nearly all foreign aid in January signaled the start of a major shutdown of the U.S. Agency for International Development (USAID), ending decades of American foreign aid and development programming. Over 80 percent of USAID programs were terminated, with the remaining functions transferred to the State Department.6

Globally, the financing gap for achieving the Sustainable Development Goals (SDGs) has widened to over US$4 trillion annually.7 This shortfall is particularly concerning given that only about one-third of SDG indicators are on track to be met by 2030, while 18 percent of the targets are regressing, including those targeting poverty reduction and equality. In 2025, more than 800 million people were estimated to be trapped in extreme poverty.8 Urgent action is therefore needed to reverse this trend. However global funding from ODA declined by 7.1 percent in 2024, the first decline in six years and the most recent year for which final data are available. Furthermore, only four donor countries met the United Nations target of allocating 0.7 percent of gross national income to development assistance.9

Intersecting challenges needing urgent attention

As climate risks continued to intensify in 2025, record heatwaves, floods, droughts, and wildfires underscored the growing vulnerability of societies and economies. Least-developed countries (LDCs) are disproportionately affected by extreme weather events and often lack the resources to adequately adapt and recover at pace, magnifying existing vulnerabilities. These developments also affect the operating environment of FMO’s customers and are reflected in FMO’s assessment and management of climate-related and environmental financial risks (see the section ‘Climate-related and environmental financial risk’ in the Risk Management chapter).

As evidence increasingly points to ecosystems nearing critical climate tipping points, with shifts in ocean current and accelerating sea ice decline becoming more pronounced, the cost of inaction is mounting, reflected in rising economic losses, deepening social inequalities, and escalating environmental damage. Ambitious and effective mitigation efforts, particularly in the most vulnerable regions, are crucial for safeguarding long-term resilience.10 Yet, financing remains inadequate, with the Organisation for Economic Co‑operation and Development (OECD) warning that the global response to climate change falls short of what is needed. Closing the ambition and delivery gaps will require stronger policies, accelerated implementation, and robust, legally binding measures.

These intersecting pressures of poverty and inequality, which are exacerbated by a dynamic mix of climate change, shifting political agendas, and increasing regional instabilities, underscore the urgent need for renewed global cooperation and innovative financing to keep the promise of sustainable development alive.

FMO continues to respond to these challenges by intensifying efforts to mobilize private investment. Our blended finance approach aims to help narrow the financing gap and ensure that critical investments move forward despite shrinking public budgets. This directs capital to where it is needed most to support resilience and sustainable development.

Expanding regulations that impact FMO

Financial institutions are required to responsibly manage the impact of their operations and value chains on the environment and local communities. Regulators and supervisors are continuously updating standards and setting new ones for companies to adhere to. In this section, we highlight the most important changes and updates to some of the regulations that (are most likely to) impact FMO.

Basel IV

The new EU legislative package on the Capital Requirements Regulation (CRR3) and Capital Requirements Directive (CRD6) implementing the Basel IV standards within the EU was published on June 19, 2024. CRR3 has been applied to FMO since January 1, 2025, and its implementation follows a phase-in approach. The CRD6 takes effect following its transposition into national law during 2026. The market risk framework (Fundamental Review of the Trading Book, or FRTB) under the new legislative package is expected to come into force on January 1, 2027 or later, depending on the progress of the international implementation of this framework. In addition to the implementation of the Basel IV standards, the legislative package introduced new rules requiring banks to systematically identify, disclose, and manage sustainability risks (ESG risks), and stronger enforcement tools for the supervision of EU banks.

Since 2024, FMO has set up a bank-wide project for the timely and compliant implementation of the CRR3/CRD6 amendments, which required changes in FMO’s internal policies, systems, and processes. The project is currently on track, enabling FMO to implement and comply with the required changes in line with the regulatory timelines. Full implementation of the CRD6 will follow the finalization, transposition into national law, and publication of supporting regulatory and implementing technical standards and guidelines.

The package contains several items that have been impacting FMO’s capital since January 2025 and were already considered in the 2025 Internal Capital Adequacy Assessment process. Regarding credit risk, the main capital impact is expected to come from phasing in the treatment of equity exposures to a 250 percent risk weight instead of the current 150 percent. Regarding market risk, FMO will be subject to the new alternative standardized approach for market risk (A-SA), when the new FRTB framework is applicable. The methodology is significantly more sensitive to movements in currency composition and its results are therefore more volatile.

ESG financial risks

The CRR3 and CRD6 package introduces significant amendments in relation to environmental, social, and governance (ESG) risks positioning them as key drivers of traditional financial risks. ESG risks are now recognized as external factors impacting existing risk categories, and financial institutions, including FMO, are required to systematically identify, disclose, and manage ESG risks as part of their risk management frameworks. This includes regular climate stress testing and the integration of ESG considerations into capital requirements, with adjusted risk weights for assets exposed to high levels of climate risk. In addition to this, in January 2025, the European Banking Authority (EBA) published its final ‘Guidelines on the management of ESG risks’ and ‘Guidelines on scenario analysis’ with application starting in 2026 and 2027 accordingly.

Also, FMO is required to disclose ESG risks annually as part of its Pillar 3 disclosures. However, amidst the ongoing revision of several sustainable finance regulations under the European Commission’s Omnibus proposal, the EBA issued a no-action letter advising competent authorities not to prioritize supervisory or enforcement actions on certain ESG disclosure templates while the regulatory framework is under review. This action, endorsed by De Nederlandsche Bank (DNB), provides temporary relief from enforcement for Dutch credit institutions, pending the adoption of amendments to the EBA disclosure technical standards (ITS).

Building on the European Central Bank’s (ECB) 2020 guidance for the prudent management of climate-related and environmental (C&E) risks, and the above mentioned EBA guidelines on ESG risk management that we consider as the natural successor of the ECB guidance, FMO continues to align its internal processes, disclosures, business strategy, and risk management practices with ECB, EBA, and DNB expectations. For further details, refer to the chapters ‘Risk management’ and ‘Sustainability statement’.

EU Taxonomy

In 2020, the European Commission introduced the EU Taxonomy to classify sustainable activities for financial and non-financial companies, supporting the Net Zero 2050 goal and broader environmental objectives. The Taxonomy establishes six climate and environmental objectives. Since 2023, banks must report alignment with the first two (climate change mitigation and climate change adaptation) and eligibility on all six.

In 2025, the European Commission adopted Omnibus amendments to simplify EU Taxonomy reporting: companies may omit the Taxonomy assessment of activities representing less than 10 percent of turnover, capital expenditure (CapEx) or operational expenditure (OpEx), provided such activities are explained as immaterial with appropriate contextual information. Reporting templates have been streamlined, and financial institutions with no eligible or aligned activities may defer detailed reporting until 2028, subject to the inclusion of a management statement. These amendments completed the scrutiny process on January 5, 2026, and Commission Delegated Regulation (EU) 2026/73 amending the EU Taxonomy Disclosures entered into force on January 28, 2026.

Furthermore, Omnibus proposals remain under negotiation, including raising thresholds for mandatory reporting, making sector-specific reporting voluntary, and limiting value chain data requests. FMO benefits from reduced data collection for non-material exposures as well as the option to opt out of Taxonomy reporting, and, hence, closely monitors ongoing legislative changes that may affect future compliance. See the 'EU Taxonomy' section for more on FMO’s impacts and regulatory developments.

Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) was adopted by the European Commission in 2023 but has not yet been transposed into Dutch law. The CSRD revises and extends the requirements of the EU Non-Financial Reporting Directive (NFRD). As a large public interest entity, FMO was in scope of the NFRD and is therefore among the first group of companies required to implement the CSRD. Companies subject to the CSRD must report according to the European Sustainability Reporting Standards (ESRS).

In 2025, several significant Omnibus developments have shaped the CSRD landscape:

• The Stop the Clock Directive postpones certain CSRD reporting deadlines for smaller companies during the transition to a new framework subject to the Omnibus proposal. As FMO does not qualify for this exemption as a first wave company required to implement the CSRD, it remains subject to the original CSRD reporting schedule.

• The European Commission has adopted targeted 'quick fix' amendments to the ESRS, clarifying technical requirements and simplifying specific disclosures. FMO has incorporated these changes into its 2025 reporting.

• A new legislative proposal to further adjust and streamline CSRD requirements is currently under negotiation between the European Parliament, Council, and Commission. Key topics include raising reporting thresholds and refining the scope of required disclosures. FMO is closely monitoring these negotiations to anticipate and adapt to any changes that may affect its reporting obligations.

• Work is ongoing to develop a simplified set of ESRS, aimed at reducing complexity and administrative burden, especially for smaller entities. FMO will assess any relevant changes and adjust its reporting approach as needed.

FMO continues to adhere to the CSRD and ESRS requirements, proactively implementing adopted changes and monitoring ongoing legislative developments. This is the second year that FMO is publishing a report in accordance with the ESRS. For further details on FMO’s approach and the evolving regulatory context, see the 'Sustainability statement' section of this report.

The Digital Operational Resilience Act

The Digital Operational Resilience Act (DORA) is a European regulation designed to create a standardized and comprehensive framework for digital operational resilience across the EU financial sector. This regulation provides a unified set of rules for the use of ICT systems by financial institutions, emphasizing governance and board responsibilities, ICT risk management, security and business continuity, resilience testing, and third-party risk management. DORA, along with its underlying applicable rules, came into effect on January 17, 2025.

FMO has made substantial progress in implementing DORA. As of July 2025, the DORA project implementation was marked as 'completed,' with the remaining action items integrated into 'Business as Usual' (BAU). FMO aims to have the latest items implemented by the end of Q1 2026. FMO Investment Management B.V has updated its policy framework and organizational handbook. Intra-group arrangements with FMO are expected to be completed in Q1 2026.