Our investment process
FMO makes complex investments in businesses and projects in developing countries. We aim to create sustainable development in places where it is needed most and other financiers shy away from the risk. Before we invest and during the investment period, we carefully research the financing opportunity and assess its wider impact on local communities, the environment and society.
Our investments are guided by a framework of policies that ensure that sustainability is at the heart of our operations and our way of working adheres to the highest ethical standards. The environmental risks we assess relate to the impact a project may have on for example air emissions and water quality and availability. Social risks include workers’ health and safety and labor rights. Human rights risks are, in addition to the company’s employees, related to the impact on the community, land rights or indigenous people.
As a bank FMO runs the risk of becoming involved in money laundering or terrorism financing. Furthermore, FMO runs the risk of financing sanctioned entities or financing customers with a bad reputation in general. One important way of mitigating these risks is to ensure that FMO conducts business with reputable customers and has adequate policies and procedures to deter criminal activities.
For an overview of the applicable investment policies, guidelines and tools, see www.fmo.nl/policies-and-position-statements.
Within our key sectors we identify potential opportunities by means of deep-rooted networks in developing countries.
In our initial selection we check the country, exclusion list, the viability of the investment plan and the business itself, the impact of our financing and our additionality. Only opportunities that make a meaningful contribution to our strategic SDGs on both corporate and sector level are further analyzed.
If the financing opportunity meets our investment criteria, we continue to analyze potential risks and challenges.
Since we work in challenging business environments, we further research our potential client and the local situation by conducting a Know-Your-Customer assessment to ensure that the client complies with anti-money laundering, anti-corruption and anti-terrorist financing regulations. This includes checks such as verifying the ultimate beneficial owners of the clients, identifying politically exposed persons and screening against international sanctions lists. These integrity checks are also performed during the relationship with the clients. During this stage we also make an initial risk categorization based on the potential effects on environmental, social and human rights conditions, as well as governance structures benchmarked against the IFC Performance Standards.
3. Due diligence
To fully understand and map the risks and opportunities, we conduct thorough due diligence, including on-the-ground research through local visits.
We visit the client and local stakeholders to discuss the impact of FMO’s financing, their business, and environmental, social and human rights risks in detail. We continue analyzing the business, its financials, the business plan, legal aspects, ESG, the client’s tax practices and policies, with our tax department providing expert advice where needed. If we identify gaps in meeting international standards or policies, we develop action plans to mitigate and manage the identified risks and promote positive development in these areas.
As the long-term viability of a project often depends on its social license to operate, we engage key stakeholders to better understand the local context.
We consult local key stakeholders early in the project to better understand the local context and assess the impacts of our involvement. Moreover, we give stakeholders the opportunity to provide input for our decision-making on new transactions with a high environmental or social risk profile. As of 2018, we publish all our proposed investments on our website.
After internal approval, we sign an agreement with our clients to ensure that our requirements and conditions are legally binding.
For each investment, we assess the ESG risks, identify where improvements can be made and establish action plans for further development. We disclose our investments on our website after contracting.
6. Monitoring & value creation
Throughout the lifetime of the investment we monitor performance and progress and look for opportunities to add value.
We receive annual or more frequent financial reports, conduct assessments (including ESG reviews) with the help of local consultants and pay regular visits. If necessary, we support our clients with capacity development and technical assistance to improve their business and identify new opportunities.