Promotion of green finance

Explanation

FMO is aiming to both grow its green portfolio and align it with a 1.5°C pathway. As such, the Bank steers its investments “towards projects that foster the transition to a more inclusive and greener economy”. To do so, the Bank works on direct green debt and equity with clients in the Agriculture, Food, and Water (AFW) and Energy (EN) segments of its portfolio, as well as through its Financial Institutions (FI) portfolio. This involves working with local banks, microfinance institutions (MFIs) and non-banking financial institutions (NBFIs), offering different green financial instruments, e.g., green credit lines and green bonds. For example, in 2020 FMO supported Ameriabank with the development of their Green Bond Framework to issue the first green bond in Armenia, in an operation with an estimated value of USD 50 million. In a similar fashion, FMO partnered with Khan Bank to provide USD 35 million (of a total USD 60 million offering) of Mongolia’s first ever Green Bond, supporting the country’s goal of increasing green lending to 10% by 2030.

FMO was also recently awarded new green guarantee programmes by the European Commission under the framework of the European Fund for Sustainable Development plus (EFSD+), to be deployed over the next 3-5 years. The aim of these is to support investment in the energy transition and climate resilience in developing countries. Through this new award the Bank will be able to expand their work with three programmes:

1. Nasira, an already constituted risk sharing facility that will be scaled up to reach new regions.
2. The work on the Dutch Fund for Climate and Development (DFCD), covering several initiatives on increasing resilience of communities and ecosystems.
3. The creation of the Indesta fund, focused on offering credit guarantees for the energy sector.

FMO also deploys innovative financial mechanisms for climate action under different facilities. An example of this is the Climate Investor One facility, which targets infrastructure projects in the wind, solar and hydro sectors across Africa, Asia and Latin America and offers whole-of-life financing. More recently, FMO alongside a set of consortium of partners started managing the DFCD on behalf of the Dutch Ministry of Foreign Affairs.  Through this venture, FMO provides grants, equity, and debt as well as post-construction phase community development and technical assistance financing to originate deals for climate action (predominantly adaptation but also mitigation) in developing countries. Areas supported include climate-resilient water systems and freshwater ecosystems, forestry, climate-smart agriculture and restoration of ecosystems to protect the environment.

Greening the system

FMO’s mandate of working with the private sector and entrepreneurs in low- and middle-income countries gives the Bank a special role and opportunity to support countries in greening their financial systems and investments. As such, FMO enables South-South knowledge exchange to disseminate best practices around the globe by bringing together key players and regulators. An example of this is FMO’s Green Microfinance Study Tour.

As part of its Climate Action Plan, FMO has pledged to aim to build a portfolio of at least €10 billion, including mobilization, in SDG 13 investments for climate action. This will involve helping to create and develop new markets while also closing the financing gap in emerging markets through changing “unbankable opportunities into bankable projects”. Some noteworthy examples of FMO’s market creation efforts include The Rallying Cry initiative, a platform for “fostering new leadership and upscaling private sector climate and gender solutions in Africa”, currently focused on agribusiness in Kenya and Zambia. The work done through the DFCD is also relevant in this regard, with FMO using blended finance to support the upscaling and bankability of several climate-change related projects in early stages.

Green bonds

The Bank offers three different types of bonds: sustainability, green and social bonds (including bonds offered in local currency). Sustainability bonds have been offered since 2012, making FMO the first green bond issuer in the Netherlands. At this stage the international green bonds market was still in early phases, before taking off in 2013 with the IFC USD 1 billion benchmark issuance. In the European context, FMO was a first mover in the issuance of green bonds – ahead of both AFD and KfW by two years, with these institutions first issuing these instruments in 2014. FMO’s specific ‘green’ and ‘social’ bond categories were added with the Sustainable Bond Framework (SBF) update of 2018.

There are three categories of assets financed by the green bonds: climate change adaptation, mitigation, and “other footprint” projects. The last category includes projects that do not directly relate to mitigation or adaptation but have a “positive impact” on the environment, such as water quality, waste treatment and/or biodiversity protection. Assessment of eligible green projects under the SBF (as of the latest 2020 version) consists of a multi-stage process with three key junctures. Projects are first assessed against FMO’s Green definition and principles, as part of a “GHG and Green Screen” to determine eligibility. FMO’s Credit department then reviews all requests and validates or requests further information as required. Finally, projects are assigned a “Green label” percentage and (provided this is non-zero) will be eligible for financing by bond funds up to the proportion of this percentage.

For water-related projects to be eligible under the “other footprint” category of FMO’s green bonds, these must be 20% more water or energy efficient than the most likely alternative or facilitate a shift to a less stressed water resource (without contributing to the depletion of another stressed water resource). For waste management projects to be eligible, this should in most cases be the core business activity of the client (in order for them to be considered a green client). If it is not the main activity, projects may still be considered eligible on the basis of further assessment.

Projects related to fossil fuels, transport dedicated to fossil fuel, biofuel from sources that deplete the carbon pool and compete with food sources, deforestation or activities not aligned with good agricultural practices, and large hydro (>20 MW) are excluded from being eligible green projects. On the other hand, Social Bonds are aimed to reduce inequality and can include projects on energy, agribusiness, food and water that do not fall under the mitigation/adaptation categories. Previously, all the projects would fall under the frame of the sustainability bonds but after the 2020 SBF update all three categories are issued, with the sustainability category being eligible for projects that support either of the other two categories.

According to Sustainalytics, FMOs Sustainability Bonds Framework is “credible and impactful and aligns with the four core components of the Green Bond Principles 2021, Social Bond Principles 2021 and Sustainability Bond Guidelines 2021”, being ranked 2^nd out of 987 banks analysed. Like AFD, EBRD, and other DFIs, FMO is part of the Green Bond Principles, a voluntary framework to increase transparency and reporting for green bonds.

Recommendations:

• Currently green finance transactions are subject to regular monitoring. FMO should include an M&E component in green finance transactions to enable integration of lessons learnt regarding the financial mechanisms deployed.
• FMO could benefit from signing up to the Green Bond Transparency Platform of IDB, following other PDBs such as KfW, AFD and EIB. This would enable the sharing of lessons learnt and success factors across regions.