E1 ESRS 2 GOV-3 Integration of sustainability-related performance in incentive schemes

As explained in 'ESRS 2 - Governance of sustainability matters', there is no direct relationship between sustainability-related elements, including climate, and remuneration elements in FMO's remuneration policy. Along with many other elements, climate-related performance only has an indirect effect on remuneration, even though it can contribute in part to individual annual performances.

E1-1 Transition plan for climate change mitigation

FMO does not have a formal transition plan, however, information included in this section is described in other relevant FMO documents and covers elements that describe our approach to climate change mitigation.

Two sets of actions, directly contributing to climate change mitigation, can be classified as decarbonization levers, as per the ESRS definition:

1. Aligning our portfolio and investments with the Paris Agreement goals.

2. Increasing climate investments and support to our customers.

These levers are described in more detail in section 'E1-3 Actions and resources in relation to climate change policies'.

FMO monitors its GHG emissions and has specifically set a GHG emission reduction target for its power generation portfolio: the Power Generation Emission Reduction Target. FMO aims to reduce emissions from financed scope 1 emissions in power generation by 50 percent in 2030. This target was developed using a 1.5°C pathway scenario (REMIND-MAgPIE 3.0-4.4, Scenario: Orderly - Net Zero 2050 scenario, electricity). FMO has not yet set targets for financed emissions beyond its power generation portfolio and additionally steers on climate action through its SDG 13 target as described in ESRS 2 (see ESRS 2 IRO management). This is due to the many unknowns ahead including how climate change itself will evolve, how our markets and customers will respond, lack of data, and what solutions are needed and effective. We seek to carefully balance our climate objectives with customer- or location-specific social and environmental considerations, including the need for a just and inclusive transition. More details on the power generation target are provided in section 'E1-4 Targets related to climate change mitigation and adaptation'.

FMO has set the ambition in its 2030 Strategy to be Net Zero by 2050. FMO strives to align financial flows with 1.5°C aligned sectors and activities. In 2025, FMO did a pilot to assess the 1.5°C alignment of the portfolio. This will inform our next steps in our journey to be Net Zero by 2050. FMO has developed and implemented a Paris alignment assessment methodology, based on internationally acknowledged guidelines and best practice. As a component of our climate change mitigation approach, we will continue to improve our data collection, including at the level of our customers, and use it to assess our progress.

FMO recognizes that climate objectives should be carefully balanced with customer- and/ or location specific social and environmental considerations, including the need for a just and inclusive transition and will further study how to treat potential tradeoffs in this regard. In addition, FMO invests in projects that contribute to GHG removals and storage, including forestry, and aims to grow forestry investments.

The significant operational expenditures (OpEx) in the form of internal and external staff required for the implementation of the decarbonization levers are provided in section 'E1-3 Actions and resources in relation to climate change policies', since they are aggregated for the implementation of the Climate Action Plan. The Climate Action Plan includes actions on both climate mitigation and adaptation.

There are no material capital expenditures (CapEx) in the form of investments in FMO's own operations associated with the transition plan, as explained further below and in the section 'ESRS 2 - Our sustainability reporting approach'.

FMO has no key (physical) assets in its own operations that materially contribute to climate change, nor do we sell any direct-use products. As such, no carbon lock-ins are expected to occur in the own operations of FMO under the definition provided in ESRS E1.

In relation to the application of the lock-in definition for investments in the investment portfolio, as of today FMO does not have a definition of carbon lock-ins related to investments. FMO may have carbon-intensive assets in its current portfolio, for example, via indirect investments through financial intermediaries in the Financial Institutions portfolio. However, mechanisms are in place to mitigate this risk in the investment portfolio. In this regard, a distinction between new and legacy investments should be made:

1. For new investments:

   • The Combined Position Statement on Coal and Phasing Out Fossil Fuels excludes and screens out investments that are expected to have a high risk for future carbon lock in.

   • FMO uses the Paris Alignment methodology to screen potential investments for alignment with the Paris Agreement. See section 'E1-3 Actions and resources in relation to climate change policies' for more background on the methodology.
     
     

2. While there may be carbon-intensive assets locked in, in the current portfolio, the Power Generation Emission Reduction Target applies to both new and existing investments, thereby ensuring that the total emissions from investments in power generation will be reduced by 50 percent in 2030. See section 'E1-4 Targets related to climate change mitigation and adaptation' for more information on the Power Generation target.

For the financial year 2025 FMO will opt out from detailed reporting in accordance with the EU Taxonomy, as no activities are claimed as being associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9 of Regulation (EU) 2020/852 (Taxonomy Regulation).

Based on FMO’s interpretation of as investments in physical assets in scope 1 and 2 of an organization, there is no CapEx to be identified as material for FMO. As a financial institution, FMO does not do climate-related investments in physical assets in its own operations that can be considered material (see 'ESRS 2 - Double materiality assessment'). FMO is awaiting guidelines or sector standards specifically for financial institutions for possible adaptation of the CapEx definition to financial institutions.

FMO is not excluded from the EU Paris-aligned Benchmarks.

The decarbonization levers presented are based on FMO’s 2030 Strategy and the CAP, i.e. the aims and actions described are embedded in FMO’s strategy. This is explained in more detail in the chapter on 'E1 Impact, risks, opportunities'. Details on the progress of each of the decarbonization levers are provided in 'E1-3 Actions and resources in relation to climate change policies'. Details on the targets that are part of the decarbonization levers (e.g. the Power Generation Emissions Reduction target and €10 billion SDG 13 target) are provided in 'E1-4 Targets related to climate change mitigation and adaptation'.

The 2030 Strategy was approved by the Supervisory Board in 2022. The CAP was approved by the Management Board in 2022.

In 2025, FMO has been actively monitoring external developments regarding transition plan expectations (e.g., Omnibus, EBA Guidelines on the management of ESG risks). FMO will reevaluate the desired approach in due time. For the 2025 annual report, FMO continues to rely on its Climate Action Plan and the additional elements described in section on E1-1.

E1-2 Policies related to climate change mitigation and adaptation

Our material IROs related to climate change are covered in the following two policies.

1. Sustainability Policy

2. Climate-related and environmental financial risk policy

In the following sections, these policies are described in further detail. FMO’s commitments and actions on climate are described in the CAP and reported in ‘E1-3 Actions and resources in relation to climate change policies’. All policies are subject to frequent revisions as per the Bank Risk Policy and are continuously evolving.

Sustainability Policy

FMO’s sustainability policy is mostly related to our (positive and negative) impacts and is described in more detail in 'ESRS 2 - IRO management'. The Sustainability Policy encompasses FMO’s organizational activities, including energy consumption, resource utilization, travel practices, and new investments, addressing all products offered by FMO. As such, our Sustainability Policy covers how we manage climate-related impacts throughout our value chain. The Sustainability Policy is complemented by several position statements and an exclusion list. For climate change the most noteworthy include:

• Our Combined Position Statement on Coal and Position Statement on Phasing Out Fossil Fuels from our Investments reflects our approach to phasing out fossil fuels from our portfolio, both direct and indirect.

• Our Position Statement on Hydro Power Plants outlines our approach to investing in hydroelectric projects, emphasizing the balance between harnessing their economic and environmental benefits and rigorously assessing and mitigating potential technical and E&S impacts, including adherence to IFC PS and continuous monitoring.

• Our Position Statement on Impact and ESG for financial intermediaries outlines FMO’s structural approach to impact steering and ESG management in financial intermediary financing, including restricting our financial intermediary portfolio exposure to coal activities, and promoting and advising on green credit lines or green bonds that support climate action.

• Our exclusion list contains the activities, products, uses, distribution, business or trade that FMO and the borrower will not finance, extending to the borrowers’ shareholders, their affiliates and their subsidiaries.

Additional major documents and processes that explain how material climate positive and negative impacts are managed are:

• The Paris alignment methodology, which describes our methodology for checking our new investments for alignment with the Paris goals, thereby helping our clients with the transition to become Paris aligned.

• ESG in the investment process: While the Sustainability Policy explains FMO’s ESG management process, this is operationalized via different internal documents such as the Risk Appetite Framework, Investment Criteria, and SIS manual.

• The Green Label Guidelines are used to assess eligibility of new investments for a ‘Green Label’. A Green Label is assigned based on the ex-ante potential of an investment in terms of its positive impact on our portfolio, including for instance the reduction of greenhouse gas emissions, increasing resource efficiency, preserving and growing natural capital, and/or supporting climate adaptation. The label is not intended to monitor (ex post) impact. The Green Label thereby serves as a strategic steering tool and a proxy for FMO to measure progress against its €10 billion SDG 13 2030 target.

In relation to the upstream value chain, an additional relevant document is the Sustainability Bonds Framework (SBF), which addresses the four key pillars of the ICMA ESG Bond Principles. The framework explains how FMO attracts private or public funds by issuing sustainable or green bonds in the capital market. Moreover, FMO aims to mobilize public and private capital and to create new bankable opportunities, as described in our 2030 Strategy.

Climate-related and environmental financial risk policy

The Climate-related and environmental financial risk policy covers our climate-related risks in the entire value chain. Complementing this policy, the climate risk methodology explains how we identify the physical and transition risks associated with climate change.

All policies are subject to frequent revisions as per the Bank Risk Policy and are therefore continuously evolving.

The Climate-related and environmental financial risk policy aims to:

1. Define climate risk in terms of physical and transition risk drivers.

2. Introduce the approach used to identify climate risks in all FMO’s operations, products, and services.

3. Define the roles and responsibilities related to climate risk identification, assessment, and action.

Table 16. Minimum Disclosure Requirements for Climate-related and environmental financial risk policy

With regards to climate change mitigation, FMO manages material IROs through several processes. Most importantly, through our Green Label guidelines, with which we aim for our portfolio to materially contribute to climate mitigation, reduction of GHG emissions and/or increasing sequestration of GHG emissions from the atmosphere (along with adaptation and energy efficiency, as described below). FMO’s Green Label definition is based on the Common Principles for Climate Mitigation Finance Tracking, as defined by the Multilateral Development Banks. All Green-labelled investments should meet FMO’s Green Principles, namely that Green-labelled investments contribute to a genuine improvement and should not contribute to a long-term lock-in of high carbon infrastructure. A genuine improvement implies that 1) the improvement goes beyond the local regulatory requirements 2) the improvement is unrelated to local resources stress and 3) the improvement is sustainable throughout the value chain of an industry or a business. The implementation of our Paris Alignment methodology contributes to further aligning our new investments to the Paris Agreement.

Furthermore, as per our combined Position Statement on Coal and Phasing Out Fossil Fuels, FMO will not invest in any upstream coal mining activities, transportation of coal, construction or renovation of a coal producing plant, or other associated business or infrastructure. Other fossil fuels are only invested in the exceptional case that a transition phase is deemed necessary to improve a country’s energy accessibility. The combined position statement applies to both direct and indirect investments of FMO.

The Sustainability Bonds Framework (SBF) sets out a list of climate change mitigation activities eligible for the sustainability bonds issued.

The Climate-related and environmental financial risk policy includes components such as knowledge and awareness development, embedding climate risk in the organization's strategy, governance, risk appetite determination, policy adjustments, stress testing, climate risk assessment methodology development, and internal and external reporting.

FMO manages its knowledge components and supports customers primarily via technical assistance. Investment teams are responsible for assessing climate risks and it is at their discretion to discuss the outcomes with clients. The Risk department maintains the methodology and supports knowledge development across the organization.

Besides climate mitigation, FMO also aims to contribute to climate adaptation. Most notably, we do this through our Green Label, through which we label those investments that ex ante are expected to positively contribute to climate adaptation. For a customer or an activity to be eligible for a Green Label in this category, it needs to be assessed to meet the climate adaptation principles set by the IFC-MDB joint methodology for climate change adaptation. This means that climate change adaptation is defined as achieving climate resilience outcomes in response to relevant climate change impacts, by managing or reducing physical climate risks, reducing the underlying causes of vulnerability and avoiding maladaptation.

Our Paris Alignment methodology further aims to ensure a minimum level of resilience for Paris alignment.

Our physical Climate Risk Assessment underpins our climate adaptation label analysis.

The SBF sets out a list of climate change adaptation activities eligible for the sustainability bonds.

Following the EDFI Statement on Climate and Energy Finance and as part of our Climate Action Plan, FMO aims to finance initiatives that contribute to adaptation and resilience to climate change, especially in respect of vulnerable communities and natural ecosystems.

Improving energy efficiency is one of the ways by which FMO strives to remain climate neutral in all its operational activities. FMO looks to build-up a portfolio that is targeted at improving access to basic services, such as energy, and aiming to optimally use scarce resources.

Energy efficiency is seen as a form of climate change mitigation when assessing activities according to the Green Label Guidelines: at least 20 percent reduction in energy consumption or GHG emissions is required for it to comply with that category. Through our E&S practices, we apply IFC PS3: Resource Efficiency and Pollution Prevention, which is specific for water and pollution (e.g. air, noise, water) related impacts and for opportunities on efficiencies (e.g. energy or water).

This also involves the issuance of sustainability bonds used to finance renewable energy and improve energy.

Regarding renewable energy deployment, following the EDFI Statement on Climate and Energy Finance, our Sustainability Policy states that FMO is committed to increase its share of investment that contributes to low-carbon, reliable and affordable energy. As described previously, through our Green Label and Position Statements, we aim to increase our portfolio’s share of contribution to renewable energy deployment and avoid investments in non-renewables respectively. Also, investing in renewable energy is central to our Energy sector strategy, which is one of the three core sectors in which FMO invests.

Finally, FMO aims to increase the volume of investments in biodiversity and forestry, to remove carbon and increase resilience. For further information please refer to 'E4 Biodiversity and Ecosystems'.