As of today, FMO is committing to a new Position Statement on Impact and ESG for Financial Intermediaries. It provides an overview of FMO’s key considerations for its approach to reach its impact ambitions and to manage Environmental, Social and Governance (ESG) risk regarding investments in Financial Intermediaries - including Financial Institutions and Private Equity Funds.
FMO considers its Financial Intermediary customers and investees key partners in creating inclusive and sustainable prosperity. A healthy financial sector and accessible finance are cornerstones of a strong economy and private sector. Through our investments in Financial Intermediaries, we reach Micro, Small and Medium Enterprises (MSMEs). We increase access to capital, support business growth and channel finance to businesses and end-beneficiaries that FMO otherwise cannot directly finance in an efficient manner. Through investments with customers or investees of their own, Financial Intermediaries have great potential to positively contribute to development and to support the proper management of ESG and Human Rights risk, both as individual organizations and at sectoral level.
The Position Statement on Impact and ESG for Financial Intermediaries acknowledges the fact that - while FMO’s relationship with the end-beneficiary of our financing via Financial Intermediaries is indirect by nature, and although our policies and practices are geared towards avoiding and mitigating harm - we cannot rule out unforeseen negative effects related to our indirect financing. Therefore, FMO applies a structural approach when working with (and through) Financial Intermediaries. FMO may require (and help) the Financial Intermediary to build additional capacity at the institutional level.
The Position Statement describes FMO’s structural approach to Financial Intermediary financing, including how we shape our customer relationship (see more below) and subsequently how we view FMO’s responsibility under the UN Guiding Principles. It also describes FMO’s risk appetite to work with Financial Intermediaries towards compliance with ESG standards.
Historically, the majority of FMO’s customer relationships with Financial Intermediaries are based on general on-lending loans, asset class loans (for example focused loans dedicated to SMEs as an asset class) or equity (fund) investments, where the eventual destination of the on-lending or sub-investment is not specified. In these relationships, FMO works with and supports Financial Intermediaries to improve institutional capacity across the board through our ESG requirements and expert support.
The new Position Statement on Impact and ESG for Financial Intermediaries describes the possibility for FMO to adopt the “specific assets approach” for ESG risk management for debt transactions. In these transactions FMO’s funds are earmarked for a specific end use (specific assets) which is traceable and clearly distinguishable from the remainder of the general portfolio of the involved Financial Intermediary. FMO could opt for this specific assets approach when, for example, it aims to reach targeted end-beneficiaries and impact objectives through (innovative) dedicated credit or guarantee lines, or when we follow trusted partners who apply this approach. In these instances, we may tailor our relationship and focus our approach on Impact and ESG to cover and apply only to the specific assets targeted for such end use.
FMO aims for a balanced approach in which we generally continue with the ambitious portfolio approach to Impact and ESG, but may opt for a more limited, tailored specific assets approach with a commensurate ESG risk management, in certain debt transactions on a case-by-case basis.
The Position Statement on Impact and ESG for Financial Intermediaries is an integral part of the FMO Sustainability Policy framework that is steering FMO’s activities. Position Statements are complementary to the overarching Sustainability Policy and they reflect our choices and approaches in case these deviate from what is described in the Sustainability Policy. The Position Statement on Impact and ESG for Financial Intermediaries clarifies how the Sustainability Policy and the thematic Position Statements translate to Financial Intermediaries in case the approach for Financial Intermediaries diverges on a policy level.
We have consulted with relevant stakeholders on various occasions during the development of this document. We conducted a formal public stakeholder consultation on the latest draft Position Statement on Impact and ESG for Financial Intermediaries between May 3rd and June 10th, 2022. The related Consultation Report can be found here.
The full Position Statement on Impact and ESG for Financial Intermediaries can be found here
