Fossil fuel exclusion policies

Explanation

As a member of the European Development Finance Institutions (EDFI) group, in 2020 FMO committed to cease new coal or fuel oil financing and to limit other fossil fuel investments, such as “selective investments in gas-fired power generation”. This commitment includes direct investments, indirect investments made through investment funds, and dedicated lending via financial institutions. EDFI members have committed to align all new financing with the Paris Agreement by 2022 and to achieve net zero emissions portfolios by 2050 at the latest.

Coal

In terms of direct investments, FMO will not finance:

• Any upstream coal activities including coal prospection, exploration, mining or processing;
• Any coal production, storage and transportation activities;
• Any thermal coal power generation plant delivering electricity to the grid;
• Associated facilities;
• New infrastructure or any business with planned or expected expansion of infrastructure for the use of coal for captive power and/or heat generation.

In terms of indirect investments, FMO “can invest in Private Equity Funds or provide loans to banks and non-bank Financial Institutions that provide loans to, or invest in coal-fired power projects, coal mines and dedicated thermal coal transport/infrastructure, to a maximum threshold of 20% of the Financial Intermediary’s total balance sheet or total investment portfolio”.  According to the Bank, FMO investments in Private Equity funds that have existing coal exposure bar the relevant fund from making any new investments in coal activities. As a result, the percentage exposure to coal of these funds is expected to decline organically as the fund grows and coal exposure declines.

FMO´s Private Equity Funds and new dedicated lending (with a use of proceeds) through Financial Institutions will not finance:

• Any upstream coal activities including coal prospection, exploration, mining or processing;
• Transport and related infrastructure primarily (more than 50% of the infrastructure´s handled tonnage) used for thermal coal for power generation;
• Construction of or refurbishment of any coal-fired power plant delivering to the grid and;
• Any business with planned expansion of captive coal infrastructure used for power and/or heat generation.

Oil and gas

In terms of direct investments, FMO will not finance any exploration and extraction of fossil fuels.

FMO will not finance the production, storage and transportation of fossil fuels for both non-power and power generation. The financing of the generation of electricity using HFO/LCO and their associated facilities, and of transmission infrastructure used to connect generating capacity based 100% on HFO/LCO, is also not permitted.

FMO has committed to phase out direct investment in mid and downstream fossil fuel activities for power generation. A transition period of five years (until 2026) has been allowed, with corresponding strict “Transition Criteria” implemented. During this transition period, FMO allows, the direct financing of gas electricity generation with the caveat that it meets the “Transition Criteria A”. Similarly, FMO also allows the financing of distributed energy solutions if it meets “Transition Criteria B”, and of transmission infrastructure used to connect generation capacity based 100% on gas if it meets “Transition criteria C” (the Transition criteria are covered in more detail under the relevant sub-heading). Furthermore, FMO allows the financing of expansion and/or upgrade of transmission and distribution networks without any restrictions.

As to indirect investments, FMO will not allow new investments in the exploration and production of oil, and standalone exploration and production of fossil gas.

FMO does not allow new investments in crude oil pipelines, oil refineries, and the construction of new or the refurbishment of any existing HFO-only or diesel-only power plants. However, FMO has no restrictions for the indirect financing of:

• Gas electricity generation and their associated facilities.
• Distributed energy solutions.
• Transmission infrastructure used to connect generating capacity based 100% on HFO/LCO.
• Transmission infrastructure used to connect generation capacity based 100% on gas.
• Expansion and/or upgrade of Transmission & Distribution networks.

Transition Criteria

FMO will “no longer invest directly in upstream or mid-stream stand-alone fossil fuel related activities [and] will phase out direct investments in integrated mid/down-stream fossil fuel activities for power generation”. This phase out will happen over a period of 5 years, with the final deadline being June 1^st 2026. FMO will allow some financing of gas-based and distributed energy solutions during this transition period based on a set of three “Transition Criteria”.

Transition Criteria for Gas-based power generation

• The country of investment faces challenges in terms of access to energy, access reliability or grid stabilisation (e.g., management of demand, intermittent generation, ancillary services, or the peak);
• The country of investment is a Least Developed Country (LDCs) or SubSaharan African country classified as Low-Income Country (LIC);
• There is no economically and technically viable renewable energy alternative to ensure flexible non-intermittent power;
• The investment is consistent with the objectives of the Paris Agreement (“Paris-aligned”) and with the decarbonization trajectory of the sector or country; and
• The lowest emission gas generation technology available is to be chosen, considering sector needs and efficiency rates. Note that, when possible, combined cycle gas turbines (CCGTs) will be the preferred option, due to their efficiency.

Transition Criteria for Distributed Energy

• For direct investments in distributed power generation solutions (off-grid, mini-grid, and commercial & industrial (C&I) hybrid), we require a minority share (<50%) of power generation to be from fossil fuels, the remaining being from renewable energies and batteries. The majority of “expected” generation should come from renewables (i.e., actual wind solar production may differ per year based actual wind and sun hours). We encourage customers to transition to renewable alternatives for direct investments in industrial distributed energy solutions for non-power purposes.

Transition Criteria for Transmission and Distribution

• FMO may invest in new or existing transmission lines that are necessary to link 100% gas-based power generation (which meets the transition criteria A for gas-based power generation, as per above) to the electricity grid.

Supply-side energy efficiency

Under the FMO’s Green Methodology, the following supply-side energy efficiency measures are eligible for a green label:

• Greenfield Transmission: New transmission systems (lines, substations) or new systems (e.g., new information and communication technology, storage facility, etc.) and mini grid to facilitate the integration of renewable energy sources into the grid.
• Renewable energy power plant retrofit.
• Greenfield Distribution Expansion: Connecting new users to the grid that under a business as usual (BAU) scenario use GHG intensive power sources e.g. use diesel generators for power production.
• Brownfield Network Upgrade: Improving the dispatch of electricity from low carbon generation and reducing curtailment of renewable energy through an interconnection or reducing losses and improving energy efficiency through ultra-high voltage transmission lines, retrofit of substations, distribution systems and/or technical losses, excluding capacity expansion.
• Indirect Improvement: Other investments in the grid structure that are a prerequisite to prepare the grid for a planned national increase in Renewable Energy generation (as evidence by the Intended Nationally Determined Contributions); or (at a minimum) maintain the current share of Renewable Energy produced electricity in the grid.

Across green-labelled investments, FMO’s “no lock-in” principle applies. However, there is no evidence of any supply-side energy efficiency exclusions to guard against contributing to lock-in, or explicit emissions performance standards relating to fossil fuels, across the wider portfolio.

Recommendations:

• It is recommended that FMO applies a principle of no carbon lock-in across all of its investments (beyond only those under its Green Methodology). This could be achieved as part of the upcoming Paris alignment strategy. Whichever form it takes, this methodology should be made public.
• For transformational fossil fuel exclusion policies, FMO should strengthen the policies pertaining to indirect operations. This should take the form of a phased approach, with accompanying transition criteria in the short-term, in the same way that direct fossil fuel investments are currently being phased out.