FMO maintains a strong focus on sustainability, highlighting initiatives that allow us to better support our clients in implementing best practices. Success in this area is central to our previous, and even more so to our new, strategy. The IFC Performance Standards form the basis for FMO’s environmental & social (E&S) risk management approach. This approach comprises three parts: the selection and risk categorization of clients, the establishment of applicable E&S requirements, and, if necessary, the development of E&S action plans. In order to help clients implement E&S best practices FMO uses contractually binding action plans that are monitored over the duration of the loan period.
Throughout the investment process FMO uses its exclusion list to guide client selection. FMO does not finance any activity, production, use, distribution business or trade involving such things as forced or child labor, racist or anti-democratic media or activities or materials deemed illegal under the laws of the host country. For more information on the exclusion list, please visit our website.
This E&S risk management approach is fully integrated into FMO’s credit approval process. E&S risks are evaluated by investment teams, which include E&S specialists. E&S analysts in the Credit Department review the E&S evaluations included in the credit proposals and provide advice to the Investment Committee. At FMO, we follow what we call the four-eye principle to evaluate E&S risks in a manner that mirrors the evaluation of credit risks. FMO’s Investment Committee, which includes our Sustainability Manager, considers these E&S evaluations in addition to financial issues when making an investment decision. A total of 17 E&S professionals around the organization support this process along with investment and management staff who received topical E&S training.
E&S risk management continues after contracting through the annual monitoring of clients’ E&S risks and their action plans. Our SusTrack system allows us to track clients’ E&S reporting and action plan commitments. In 2012, FMO continued to work with the organization-wide E&S target of implementing 85% of the aggregate action items due during the reporting year, which we were happy to surpass.
In order to improve corporate governance (CG) in our client companies we use a toolkit to analyze CG risk. The toolkit was developed through the DFI Framework Agreement on Integrating Corporate Governance into investment decisions. During the second half of 2012, FMO hired its first Corporate Governance Officer who will support our investment staff in analyzing CG risks and enhancing the quality of such assessments. Since corporate governance is considered an integral part of the investment analysis, the responsibility will remain with the investment staff. For high-risk clients, however, the Corporate Governance Officer conducts an additional due diligence that results in an improvement program for the client.
Beyond the E&S target, FMO recognizes the need to measure and report on our sustainability impact. As such, towards the end of 2012, we initiated the SHIFT project to quantify our social, environmental and economic impacts through meaningful indicators. The purpose of these indicators is to ensure that we are able to steer our business in a sustainable manner and facilitate communication on this topic.
Our efforts in both the risk management and strategic sustainable development of our business have been recognized by prominent sustainability rating agencies. Both Sustainalytics and Oekom Research provided FMO with high sustainability ratings.