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Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO)

PRI reporting framework 2020

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 All three strategies combined
0 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

FMO believes that incorporating ESG opportunities into business models is essential for both mitigating risk and creating development impact. FMO works closely with the clients to assess their ESG risks, identify where ESG improvements can be made and agree on action plans for addressing improvements. FMO has elected to employ the best practice frameworks in guiding sustainability implementation in its clients' businesses. FMO's ESG process complies with internationally accepted banking, finance and sustainability criteria such as the IFC performance standards and OECD MNE guidelines. FMO continues to look for new ways to define and incorporate innovative ESG practices as well as takes part in developing and defining these standards by working together with organizations such as IFC and UNEPFI.

In 2017, FMO launched its updated and improved Sustainability Policy, which has become the leading policy document that shapes and guides FMO’s efforts towards supporting global sustainable development in an integrated manner.

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

specify description

          FMO's internal ESG specialist conduct annual monitoring of the clients' ESG Action Plans.
        

03.2. Describe how your ESG information or analysis is shared among your investment team.

03.3. Additional information. [Optional]


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
Corporate (financial)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

Initial screening: - ESG Rapid Risk Screening templates or FMO ESG Toolkit - E&S officer or analyst provides advice and support to FMO Investment Officers - FMO's credit department/Investment Committee has dedicated ESG capacity (4 eye principle) providing objective feedback on the ESG analysis attached to the investment proposals (Financial Proposal stage) being made by FMO's front office. This is a formal part of FMO's investment policy.

Due Diligence: - On high and medium/high risk investment the E&S officer conducts an E&S due diligence (in some cases with support from an external ESG consultant) on the fund manager or the company. E&S officers provides advice and support to FMO Investment Managers - FMO's credit department/Investment Committee has dedicated ESG capacity providing objective feedback on the ESG analysis in the investment proposals being made by FMO's front office. This is a formal part of FMO's investment policy.

Investment decision: - Internal credit department can turn down investment proposal for reasons of ESG issues in the project - Investment Committee approval often contains strict ESG conditions.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening

other description

          FMO has controls through the investment process that ensure compliance with our exclusion list.
        
Positive/best-in-class screening
Norms-based screening

06.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 07. Thematic investing - overview (Private)


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

For some loans we specify that the client has to use the proceeds of the loan for a specific purpose - for example to on-lend to a specific category of borrowers for example SMEs or women. Since FMO's loan size cannot exceed 10% of the total assets of a borrower (for Financial Institutions), we are never the only provider of funds to a client. Clients also get funding from the local market (loans and bonds), from other lenders like FMO and in many cases they also get deposits from the local market. Since money is fungible, we cannot distinguish the amount that we lent to a borrower from amounts that it gets from all these other sources. It is therefore impossible to verify exactly how our money is used. If we specify that a borrower has to use our funds for example to lend to SMEs, we do receive reports on the portfolio composition and development, but for the reasons mentioned above there is no real way to ensure that our loan is used for the purpose that we specify in the contract if the overall business of the FI completely changes over the lifetime of the loan.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

09.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

For all of FMO's investments ESG factors are taken into account; depending on the ESG risk category the amount of time and money spent to work on ESG challenges will vary. For the lowest risk categories, projects are assessed against national law, while high risk projects need to be fully compliant with IFC Performance Standards. Support is being provided to clients by FMO helping them to live up to these standards. FMO has a significant number of ESG officers and analysts working to assess risks, support investment managers, setup corrective action plans, monitor progress on the ESG side and provide ESG training to Fund managers. To help our direct investment clients establish sound E&S practices, we use a practical framework. The framework comprises of three parts: (1) Risk Categorization of clients, (2) Establishing applicable requirements, and (3) Environmental and Social Action Plans. For direct investment clients in category A and B+, an assessment of the E&S practices is required as part of FMO's due diligence. All FMO's higher risk clients are required to implement an Environmental and Social Management System (ESMS). This ESMS is customized for each type of client. Based on the outcomes of the assessment carried out, an Environmental and Social Action Plan (ESAP) is to be agreed upon as necessary, with clear and practical milestones to be achieved within a certain period of time. Where necessary external ESG consultants are commissioned. In certain cases FMO has funds available to improve ESG policies and procedures with, and offer training to clients.

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

Corporate (financial)

FMO's clients with a high E&S risk profile, measured by their own loan portfolio, are required over time to develop and implement such an ESMS (including training of staff) as a covenant of the loan agreement. The ESMS should include a risk categorization method, should describe how identified E&S risk exposure is being dealt with and how it is being mitigated. FMO's ESG process complies with internationally accepted banking, finance and sustainability criteria such as the IFC performance standards and OECD MNE guidelines.

FMO's monitoring of E&S risk and compliance of FI Clients is based on the FI Client's risk categorization. Monitoring will take into account ESAP compliance based on per risk cateogry. Capacity Development is provided to assist client in setting up and implementing ESMS as promote E&S best practice. FMO tracks its policy implementation through its internal sustainability tool.

Corporate (non-financial)

In assessing risk with its clients, FMO also addresses Environmental, Social and Corporate Governance (ESG) risks (and opportunities) in addition to financial risk. FMO acts to mitigate these ESG risks through the development of Environmental, Social and Corporate Governance Action Plans (ESAP + CGAP). With specific reference to only ESAP, these are agreed with clients and are contractually binding. They detail the specific steps that clients have to take in order to mitigate the identified risks/gaps. After a deal has been contracted, the ESAP's are to be actively monitored by FMO's E&S specialists to ensure the timely and appropriate completion of items prescribed by the ESAP. In addition to ESAPs, most clients are contractually required to also provide regular monitoring reports, confirming their performance against the FMO E&S requirements. Other than clients with ESAPs, there are also clients with only ESG reporting requirements.

Securitised

FMO's clients with a high E&S risk profile, measured by their own loan portfolio, are required over time to develop and implement such an ESMS (including training of staff) as a covenant of the loan agreement. The ESMS should include a risk categorization method, should describe how identified E&S risk exposure is being dealt with and how it is being mitigated. FMO's ESG process complies with internationally accepted banking, finance and sustainability criteria such as the IFC performance standards and OECD MNE guidelines.

FMO's monitoring of E&S risk and compliance of Clients is based on the FI Client's risk categorization. Monitoring will take into account ESAP compliance based on per risk cateogry. Capacity Development is provided to assist client in setting up and implementing ESMS as promote E&S best practice. FMO tracks its policy implementation through its internal sustainability tool.

The majority of our securitised assets are in private equity and energy.

 

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer`s ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify in Additional Information

11.2. Additional information [OPTIONAL]

FMO screens all transactions on ESG risk. FMO categorizes its investments in different levels of Environmental and Social (E&S) risk, similar to IFC’s approach to E&S risk categorization, which is also used by all European Development Finance Institutions (DFIs). For direct investments, risk categorization is based on the client’s activity, IFC Performance Standards triggered transactions and prevailing country specific ESG challenges.

With regard to financial institutions the risk categorization is made on the basis of the banks existing or proposed portfolio, IFC Performance Standards triggered transactions and prevailing country-specific sensitive issues.With regards to ESG in particular, FMO requires all direct investments of medium and high E&S risk to fully adhere to the ESG standards. Low risk (category C) investments are required to adhere to applicable law. For investments in financial institutions (FI), FMO requires FI-A and FI-B clients to apply the IFC Performance Standards framework to IFC PS-triggered transactions. Transactions with countryspecific sensitive issues will be addressed through the IFC Performance Standards. The rest of the portfolio needs to adhere to applicable law and, when relevant, the client protection principles. FMO requires Private Equity Funds to implement an ESG risk management system which is compliant with the IFC Performance Standards. 

During due diligence FMO executes a thorough ESG assessment on its potential clients. This enables FMO to identify the main ESG risks and strengths that a client is exposed to and to assess the quality of its risk management and mitigation measures. The findings during due diligence are important input for monitoring and engagement throughout the investment, or could lead to modification of the transaction (including cancellation).
Dedicated ESG specialists within FMO engage actively with all category A, B+, and where warranted, category B clients. The level and exact focus of engagement depend on the type and severity of impact and/or the extent to which they pose a risk to the client and FMO. ESG risk management is fully integrated in the approval process: this judgement call lies with FMO’s commercial teams while FMO’s credit team independently subjects it to critical scrutiny for verification. Both deal and credit teams have dedicated ESG specialists that are involved in the assessment. FMO applies heightened scrutiny to any investment causing complex resettlement or affecting Indigenous Peoples, critical habitat or critical cultural heritage.

For more information, refer to: https://www.fmo.nl/policies-and-position-statements


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

Corporate (financial)

FMO's clients with a high E&S risk profile, measured by their own loan portfolio, are required over time to develop and implement such an ESMS (including training of staff) as a covenant of the loan agreement. The ESMS should include a risk categorization method, should describe how identified E&S risk exposure is being dealt with and how it is being mitigated. FMO's ESG process complies with internationally accepted banking, finance and sustainability criteria such as the IFC performance standards and OECD MNE guidelines.

FMO's monitoring of E&S risk and compliance of FI Clients is based on the FI Client's risk categorization. Monitoring will take into account ESAP compliance based on per risk cateogry. Capacity Development is provided to assist client in setting up and implementing ESMS as promote E&S best practice. FMO tracks its policy implementation through its internal sustainability tool.

Corporate (non-financial)

In assessing risk with its clients, FMO also addresses Environmental, Social and Corporate Governance (ESG) risks (and opportunities) in addition to financial risk. FMO acts to mitigate these ESG risks through the development of Environmental, Social and Corporate Governance Action Plans (ESAP + CGAP). With specific reference to only ESAP, these are agreed with clients and are contractually binding. They detail the specific steps that clients have to take in order to mitigate the identified risks/gaps. After a deal has been contracted, the ESAP's are to be actively monitored by FMO's E&S specialists to ensure the timely and appropriate completion of items prescribed by the ESAP. In addition to ESAPs, most clients are contractually required to also provide regular monitoring reports, confirming their performance against the FMO E&S requirements. Other than clients with ESAPs, there are also clients with only ESG reporting requirements.

Securitised

FMO's clients with a high E&S risk profile, measured by their own loan portfolio, are required over time to develop and implement such an ESMS (including training of staff) as a covenant of the loan agreement. The ESMS should include a risk categorization method, should describe how identified E&S risk exposure is being dealt with and how it is being mitigated. FMO's ESG process complies with internationally accepted banking, finance and sustainability criteria such as the IFC performance standards and OECD MNE guidelines.

FMO's monitoring of E&S risk and compliance of Clients is based on the FI Client's risk categorization. Monitoring will take into account ESAP compliance based on per risk cateogry. Capacity Development is provided to assist client in setting up and implementing ESMS as promote E&S best practice. FMO tracks its policy implementation through its internal sustainability tool.

The majority of our securitised assets are in private equity and energy.

12.3. Additional information.[OPTIONAL]


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