ESG Action Plans and Incentives
Putting together ESG action plans for our clients has been part of FMO's financing process for many years. The ultimate goal of these plans is to mitigate a client’s ESG risks and, if possible, capitalize on opportunities to enhance ESG. Over the past few years we have made these plans SMART – specific, measurable, achievable, relevant and timely. This means that for each action plan, we identify the most relevant ESG criteria, determine which criteria have been met and identify the measures that need to be taken to meet those still outstanding. We help clients to meet ESG requirements where possible, helping them to make changes such as cutting carbon dioxide emissions, improving labor conditions, meeting legal minimum wage requirements and implementing policies for governance.
We oversee the implementation of these action plans through our proprietary Sustrack monitoring system, which allows us to monitor the ESG performance of clients on a continuous basis and enables swift intervention when necessary.
In 2012, 8% of our clients had action items due. We assisted these clients in achieving 88% of these action items (149 actions completed out of 169 actions due in 2012), exceeding our company wide target that was set to 85%. In 2013 we aim to again realize at least 85% of all the agreed action items due in the year FMO’s price incentive mechanism also encourages clients to put ESG into practice. To our knowledge, we are the first development bank in the world to have developed a framework for offering a reduced interest rate to borrowers who complete ESG action items within a set timeframe. We term this pricing incentive a 'margin reduction incentive'. The margin reduction pilot was launched in 2009, and last year we performed the first evaluation. As of the second quarter of 2012 FMO had 25 transactions with a margin reduction incentive. Between 2009 and 2011 all four eligible margin reductions were triggered on schedule. In 2012 another seven became eligible, of which three were triggered. The margin reduction incentive has indeed proved a useful tool in motivating clients to invest more energy in completing ESG action items. However, further research is needed to clarify whether this finding is applicable to all our clients or only true for clients already interested in ESG. FMO works with third-party consultants to assess whether client agreements have been fulfilled.
FMO’s Financial Institutions team held a roundtable event in Paraguay last year to help raise ESG standards in the country, bringing together industry peers to discuss issues and possibilities for implementing best practice. In Bangladesh, FMO organized an E&S study tour to the textile, ready-made garments, ship building and ship recycling industries for DFI partners. The tour was organized in partnership with our client Eastern Bank Limited (EBL), one of the leading commercial banks in Bangladesh. The study tour focused on gaining insight into the environmental and social improvements taking place in the textiles industry and understanding the E&S challenges in the ship recycling industry. This can be regarded as a first step towards jointly defining sustainable approaches to improving E&S standards in the industry. A client-focused E&S awareness event was also co-organized with EBL, bringing together the bank’s clients operating in sectors with high E&S risks to exchange knowledge, ideas and best practices.
FMO also played a key role in supporting the Nigerian banking sector and Central Bank in efforts to integrate E&S awareness in the industry. In 2012, the banking sector officially commenced implementation of the Nigeria Sustainable Banking Principles, which were developed by the banks themselves with technical advisory support from FMO and IFC. These banking principles and guidelines cover the power, oil and gas and agriculture sectors in Nigeria, providing a framework to enable the financial sector to address E&S issues in its lending and investment decisions.
FMO uses the Performance Standards developed by the International Finance Corporation (IFC) as one of its E&S tools. Another important guiding tool is our exclusion list, which clearly identifies businesses that FMO does not finance. This includes any activity, production, use, distribution, business or trade involving forced or child labor, radioactive materials, the destruction of High Conservation Value areas and more. We follow best practices in our governance standards, though these are based on independent regulatory requirements per country. We are also member of various national and international associations in the fields of responsible finance, poverty alleviation and sustainability. Please visit our website to learn more about the organizations we partner with in our pursuit of industry standards and operational criteria that contribute to a fairer and more sustainable future.