Strategic risk

Environmental, social, and governance (ESG) risks

Definition

FMO's investments may, unintentionally, lead to negative impacts on people and the environment. ESG risk is defined as the negative ESG impacts of our investments and the resulting financial risks these may pose to FMO. Negative impacts on people and the environment could result in financial risks, leading to, for example, financial (remediation, legal) costs to FMO or its customers, jeopardizing access to capital for FMO (from external investors), jeopardizing the license to operate, jeopardizing shareholder relations, or reputational damage. FMO is exposed to ESG risk via our investment selection (the risks associated with our investments, which include the investments of our customers/investees) and the effectiveness of customers’/investees’ ESG risk management, including the effectiveness of FMO’s engagement thereon.

Risk appetite and governance

FMO has a cautious appetite for ESG risk in investments. FMO strives for investments to be brought in line with its ESG risk mitigation requirements within a credible and reasonable period of time. It is understood and accepted that customers/investees need knowledge and resources to implement ESG improvements, so full adherence cannot generally be expected at the start of the relationship. Consequently, the appetite for ESG risk is open during the initial phases of an investment and reduces over time. The appetite for unmitigated ESG risk is minimal for repeat investments. At the portfolio level, FMO also has a cautious appetite for ESG risk. In view of FMO’s own capacity to support and monitor customers/ investees in improving their ESG risk mitigation, FMO seeks a manageable mix of customers/investees with (partially) unmitigated ESG risk and customers/investees with adequate risk mitigation in place.

FMO accepts a limited gap in successful ESG risk management to its standards. This gap acknowledges residual risk posed by contextual and implementation challenges in FMO's markets.

As part of its investment process, FMO screens and categorizes all customers on ESG risk according to their gross ESG risk profile (i.e. risk that is inherent to the activity to be financed irrespective of a customer's risk management performance). For a detailed description of FMO's ESG risk management process, refer to the section 'ESRS 2 - IRO management'.

For FMO’s high ESG risk investments, net ESG risk, exposure is monitored through FMO’s proprietary Sustainability Information System (SIS), the net ESG risk exposure is the investment’s gross risk exposure corrected for by the customer’s performance managing down these risks. ESG risk performance tracking in SIS is integrated within the investment process and forms the basis of FMO’s ESG target. SIS ratings are monitored and updated throughout the lifetime of the investment as part of the annual review cycle of each customer, enabling FMO to have an up-to-date, portfolio-wide view of the ESG risks in its portfolio.

FMO’s ESG performance target indicates portfolio alignment with its ESG risk appetite. The target aims for 90 percent of the ESG risks of FMO's high ESG risk portfolio to be managed adequately by its customers/investees. 95 percent of the ESG risks was managed at adequate level in 2025.

Developments

Similarly to previous year, the 2025 ESG target group covers high risk customers in FMO's portfolio contracted prior to 2025 (‘target list’). FMO continues to register the ESG risk assessments of the customers with high risk and report against the ESG target. The ESG Performance Target remains the same as in 2024, except that the target list is redefined annually, as described in the methodology. This resulted in a slightly expanded scope in 2025 (304 customers) compared to 2024 (258 customers), due to enhancements to the CG risk categorization framework.

Business model risk

Definition

Business model risk is defined as the risk of a non-viable business model or strategy, in line with FMO’s 2025 RAF. For banks in general, long-term viability is achieved when a bank is able to cover all its costs and provide an appropriate return on equity, taking into account its risk profile. For FMO, as an impact investor, business model risk is also related to the (in)ability to reach impact goals.

Risk appetite and governance

FMO’s appetite for business model risk is minimal: both the organization’s continuity and its ability to achieve its impact targets are highly dependent on its ability to generate impactful investments in often higher-risk environments and produce sufficient returns from these investments. At the same time, exposure to this risk cannot be entirely avoided, given the nature of FMO’s business model. FMO’s ability to invest is dependent on both demand- and supply-side factors, not all of which are within FMO’s direct control. On the demand side, this is most notably the demand for funding provided by FMO, which is itself dependent on activity of other DFIs and impact investors as well as commercial market risk appetite. On the supply side, in addition to market liquidity FMO takes a strategic decision to attract public funding and funding from private investors willing to take higher risks. Additionally, the nature of FMO’s investments leads to investment risk. This in turn affects FMO’s ability to generate operating income and impact. Production targets (volumes and impact) are updated on a yearly basis in the annual Business Plan and actuals are reported quarterly in the Integrated Quarterly Report. Progress against targets and potential bottlenecks are shared and discussed with senior management on a quarterly basis.

The Business Model Risk Metrics were within risk appetite during 2025.

Developments

In 2025, volatile market developments increased FMO’s business model risks. The USD FX rate changed from 1.045 in December 2024 to 1.17 in December 2025 which resulted in lower interest income. Moreover, the declining trend in margins continued across sectors. The declining margins were partly offset by larger investment volumes in 2025. Private equity (PE) fair value was positive in 2025, but the portfolio decreased due to exits and the impact of the depreciation of the US dollar. PE returns improved but remained below the aspired levels.

This development, combined with the increasing capital weighing of private equity investments required by BASEL IV regulations, has led to a review of FMO’s private equity and overall asset allocation strategy. In addition, a continued focus was placed on realizing efficiency gains throughout the organization by advancing FMO’s digitalization agenda and implementing bottom-up efficiencies. Finally, several interventions to align FMO’s investment process and operations with changing market circumstances and the evolving regulatory landscape were implemented. Some of these interventions were completed in 2025, while others will require further effort and embedding in 2026. All in all, the uncertain and volatile geopolitical environment required vigilance and flexibility to ensure FMO’s business model remains robust and relevant to achieve the positive impact we want to make in emerging and developing markets.  FMO managed to remain within risk appetite levels, with return on regular income at 3.4 percent (Target: ≥3.4 percent) and cost to regular income at 59.7 percent (target: ≤ 61 percent)

Public Funding

The business model risk for ‘Government Subsidized Program management’ is defined as the risk of losing the accreditation status as Government Program Manager and/or losing the Government Subsidized Programs due to not adequately managing them in accordance with the formal requirements or expectations of the fund provider or donor. These activities do not expose FMO to financial risks (most of these publicly funded programs are largely outside of FMO's balance sheet and are managed separately). These requirements and expectations of fund providers / donors mean that investment proposals should be assessed in accordance with internal FMO procedures, and payment and overall (risk) management are to be embedded in the FMO standard operating procedures. There is a distinction between two categories of requirements and expectations:

  • Grant compliance concerns the corporate governance and procedures of FMO to adequately identify and select investment opportunities as well as manage and monitor the risks related to the customers (projects) in which the Government Subsidized Programs are invested.

  • Fund mandate compliance includes specific requirements on what the Government Subsidized Program should aim to achieve, the level of return the investments should generate, and the countries and sectors on which the funds need to be spent. These requirements and expectations differ per program and per fund provider / donor and may include ‘revolvability’.

Commercial Mobilization (FMO Investment Management)

The business model risk for FMO regarding the activities of FMO Investment Management (FIM) is defined as the risk of failing to implement or execute the FMO Strategy 2030 due to FIM losing its position as preferred advisor and portfolio manager, resulting in a failure to mobilize external commercial funds for participating in FMO N.V. originating loans. ‘Commercial mobilization’ is an integral part of FMO’s 2030 strategy and a key element of FMO’s ‘Progression model’. FIM plays a critical role in mobilizing external commercial funds for participating in FMO N.V. originated loans. If FIM is to lose its position as preferred advisor and/or portfolio manager, a critical part of the progression model cannot be continued. FMO’s ability to achieve its impact targets, to implement the progression model’ and thereby execute the strategy 2030, are highly dependent on FIM’s ability to mobilize external commercial funds for participating in FMO N.V. originated loans. FMO’s appetite for the business model risk regarding FIM is minimal, but exposure to this risk cannot be entirely avoided. Commercial mobilization also depends on the quality and long-term performance of the investments that can be offered to the commercial funds. It should be noted that FIM is managed separately from the FMO balance sheet and operates as an independent entity.

A failure to commercially mobilize may be caused by a wide range of financial and non-financial risk events, including but not limited to:

  • Performance of FIM Serviced Funds not in line with expectations of the Fund Manager or the Funds’ investors.

  • FIM not providing adequate advice to and/or not adequately managing the portfolio of the FIM Serviced Funds in accordance with the fiduciary duty of FIM towards the FIM Serviced Funds.

  • Insufficient availability of investments that fit within the Fund mandate.

  • FIM not adequately managing outsourced activities that are essential to ensuring the integrity of the investments offered to and participated in by the FIM Serviced Funds.-

  • Loss of the license that FIM holds pursuant to the Act on Financial Supervision.

As a separate legal entity and licence holder, FIM needs to have a risk management system in place, including a risk appetite framework. This risk management system is as much as possible based on and inspired by FMO’s risk management system.

Strategy execution risk

Definition

Strategy execution risk is defined as the risk of failed execution of strategic projects, initiatives or decisions. FMO is only willing to take strongly justified project risks. Some uncertainty and variation are expected. FMO prefers options that are most likely to result in successful delivery while also providing an acceptable level of risk-reward trade-offs, where the potential rewards will clearly contribute to FMO's strategic ambitions and objectives. Examples of risks related to projects include lack of experience, resource constraints, project interdependencies and complexity and dependency on external parties.

Risk appetite and governance

FMO’s performance is measured against the year-to-date (YTD) realization of agreed deliverables (total overall FMO project portfolio level). Baseline and performance are measured in the PMO model, based on quantified data from project templates/reports. 87 percent of the project portfolio deliverables were achieved for the year.

Developments

In 2025, project selections were strongly aligned with FMO’s priorities set out in the annual business plan and regulatory requirements. The complexity of many projects, combined with human resource constraints in areas such as data, ICT, and operations, posed potential significant risks to strategy execution. To meet mandatory regulatory deadlines, prioritization and careful replanning were necessary throughout the year. External staff were recruited to expand capacity and add specialized knowledge to ensure project quality and delivery. As a result, 87 percent of project deliverables were achieved, with both expense and investment projects remaining within approved budgets.

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