| Paris alignment | Reasoning |
|---|---|
| Paris aligned | FMO’s core strategic documents extensively integrate climate considerations (both mitigation and adaptation), with explicit reference to the Paris Agreement. The Bank has also committed to striving to align its portfolio and all new transactions with a 1.5°C pathway, and to achieve a net-zero portfolio by 2050. Despite this, the absence of any clear commitment to “do no harm” remains a noticeable omission from FMO’s overarching and climate strategies. Truly transformational strategic documents would include an even stronger clear commitment such as to “do good beyond do no harm”. |
| Climate strategy | Overarching strategy |
|---|---|
| FMO’s Climate Action Plan includes a best practice commitment to strive to align new transactions and the Bank’s portfolio with a 1.5°C pathway and achieving a net-zero portfolio by 2050. The Bank will also support customer alignment (although a timeline for this is not stated) and pursue the systematic integration of climate change considerations (such as climate risk and emissions accounting) throughout FMO operations. Moreover, FMO is currently (as of 2023) developing methodologies and internal capacity to implement an “investment-level Paris alignment review for new transactions”. It notably fails to replicate best practice in integrating an explicit principle to at minimum “do no harm”. | FMOs “Strategy 2030” consistently integrates climate change (explicitly mentioning both mitigation and adaptation) throughout, reflecting the Bank’s ‘three-SDG’ focus including SDG13 on climate action. The strategy is explicitly tied to the goals of the Paris Agreement and includes an ambitious target for expanding its SDG13 investment portfolio from €4.1 billion in 2021 to at least €10 billion by 2030. It notably fails to replicate best practice in integrating an explicit principle to at minimum “do no harm”. |
Overarching strategy
FMO’s “Strategy 2030” strives toward a world where the global population lives “well and within planetary boundaries” (which is defined to include climate change). The strategy recognises that the world is behind on the goals of the Paris Agreement (and particularly adaptation finance) and that developing countries bear the brunt of this slow progress. In light of lagging progress towards achieving the Sustainable Development Goals (SDGs) globally, FMO focuses on three SDGs where the Bank’s potential for impact through emerging market private sector financing is viewed as greatest:
- SDG 8: Decent Work & Economic Growth
- SDG 10: Reduced Inequalities
- SDG 13: Climate Action
FMO’s work on SDG 13 is committed to the goals of the Paris Agreement, with the Bank explicitly committing to “support customer alignment with Paris goals and customer resilience” and to reach “net-zero [portfolio] by 2050” through a “just and inclusive transition”. Moreover, there is an explicit commitment to striving to “align new transactions and portfolio with [a] 1.5°C pathway”. This is further emphasised by a commitment to “build up a portfolio that supports mitigation, adaptation and resilience, and biodiversity-positive contributions”.
To realise these aims, FMO has set a target of an investment portfolio of at least €10 billion in SDG13 by 2030. As a reference, FMO’s total portfolio as of 2022 was €13.005 billion, with the SDG13 portion of this amounting to €4.310 billion (33.14%). This represents an increase on both figures from 2021, with the total portfolio having been €12.5 billion and the SDG13 portion of this amounting to €4.1 billion (32.8%). FMO is targeting a total portfolio of €14 billion, with an SDG13 portion of €4.9 billion (35%) for 2023. Taken together (and if 2023 targets are met), these figures show a slowly increasing trend in terms of the portion of the total FMO portfolio made up of SDG13 investments.
To manage for both physical and transition climate risk, FMO is also implementing a climate risk framework to track exposure.[1] Currently, this framework monitors FMO’s exposure to physical and transition climate risks at the portfolio level (rather than for individual investments), including a breakdown of sensitivity by industry and sector across FMO’s operations.
The overarching strategy makes reference to FMO “limiting negative impacts especially for local communities”, in recognition of the need to reconcile socio-economic development considerations with climate action. However, this falls short of what would be a stronger, strategic-level, explicit commitment to “do no harm” across all of FMO’s activities. Adopting a principle to “do good beyond do no harm” across all of FMO’s activities would reflect standard-setting best practice among public banks in this regard.
Standalone climate strategy
FMO’s Climate Action Plan commits to “aligning new investments with the mitigation and resilience goals of the Paris Agreement (country-level)” and to strive to “align both new transactions and our portfolio with a 1.5°C pathway”. FMO’s commitments on climate change are organised under three action areas:
- Aligning FMO’s portfolio and investments with the Paris Agreement goals: This involves aligning all new investments with the goals of the Paris Agreement, contributing to a portfolio that it strives to align with a 1.5°C pathway and net zero (in absolute emissions, accounting for negative emissions from carbon removal) by 2050. Reducing emissions of FMO’s power generation portfolio and phasing out fossil fuel financing is a significant part of this action area.
- Increasing FMO’s climate investments and supporting their customers: This involves building up the portfolio of investments focused on SDG 13 (in line with the aforementioned €10 billion by 2030 target), including investment in carbon removals, as well as supporting their customers in their own climate action and investing in market creation for climate objectives.[2]
- Actively managing FMO’s climate action: Referring to the systematic integration of climate change considerations throughout FMO operations. This includes monitoring portfolio emissions, implementing a portfolio-wide climate risk (both physical and transition) framework, and actively adapting FMO’s approach on the basis of new data and information.
In terms of implementation, FMO commits to a holistic approach to climate investment which will include “climate mitigation, adaptation & resilience (both including nature-based solutions), biodiversity, and other footprint reduction”. Beyond specifically their own investments, they also commit to supporting customers in their climate objectives, as well as supporting wider “market creation and mobilisation for climate action”. As of 2023, FMO is developing methodologies and internal capacity to implement an “investment-level Paris alignment review for new transactions”, likely to be based on the existing methodologies of Multilateral Development Banks and European Development Finance Institutions. The Bank is planning for operationalisation of these upcoming investment-level Paris alignment requirements to begin from 2024.
FMO identifies itself as a “change agent on environmental, social and governance topics” and is thus committed to developing their customers’ capabilities in this regard. A principle of “just and inclusive transition” is foundational to their approach to Paris alignment – committing to engaging with not yet aligned customers on pathways to alignment, rather than withholding access to financing in such cases. A similar approach is taken towards catering to customers across countries of operation, with recognition that whilst Nationally Determined Contributions (NDCs) are the starting point for Paris alignment at the country level, FMO will also “seek to raise the ambition level of our customers and strive toward 1.5°C pathway alignment”. Although the full practical implications of these approaches are not currently clearly set out, details on how they will be operationalised are expected as part of FMO’s forthcoming investment-level Paris alignment methodology.[3]
FMO explicitly recognises the slow progress made by developed countries on climate action, and the vast persistent shortfalls in financing. FMO counts “green-labelled investments” (which count towards but do not constitute the entirety of the SDG 13 portfolio target) as those contributing to “climate mitigation, climate adaptation or other footprint reduction (water, waste, biodiversity)”. The Bank’s associated screening methodology (Green Methodology) which facilitates FMO’s accounting for these investments sets out two broad principles required of all green-labelled investments:
- Contributing to “genuine improvement” beyond regulatory requirements that is sustainable throughout the value chain
- Not contributing to “long-term lock-in of high carbon infrastructure”
The second principle is not qualified further regarding what constitutes “long-term lock-in” although brownfield energy efficiency is notably included a full list of eligible activities annexed to the methodology.
Although an explicit principle of “do no harm” is absent from FMO’s Climate Action Plan, there is implicit reference through statements such as the following: “we wish to take care that our actions are not harming other sustainable development objectives”. Notably however, this statement being in reference to Paris alignment actions means climate change is not necessarily covered by this (loose) commitment. Despite not explicitly committing to “do no harm” at a strategic level, FMO does have a strong ESG framework and set of safeguards designed to guard against this in practice.[4]
Recommendations:
- FMO should more explicitly integrate a principle of “do no harm” as a minimum commitment in both its overarching and climate strategies. Beyond this, the Bank should replicate the best practice of peer institutions in striving toward a principle of “do good beyond do no harm”, especially for its climate strategy.
- When developing its methodologies and internal capacity to implement an “investment-level Paris alignment review for new transactions”, it is recommended that FMO actively plans to account for the shortcomings which have been noted by Civil Society and Independent Experts in the existing Paris alignment methodologies (particularly those of Multilateral Development Banks). This should involve critically considering the tendency to rely on country NDCs to gauge alignment, despite the sum of these entailing an overshoot of 1.5°.
[1] For further analysis of this framework, please see the “Climate risk, resilience, and adaptation” metric.
[2] See “Promotion of Green Finance” metric for further information on FMO’s market creation initiatives.
[3] Once FMO has finalised and published its investment-level Paris alignment methodology, E3G will update the analysis in this section to reflect how these overarching approaches are practically integrated.
[4] Please see “Climate risk, resilience, and adaptation” metric in particular for further evidence of this.