| Paris alignment | Reasoning |
|---|---|
| Some progress | FMO’s Climate Action Plan sets out the incorporation of nature based solutions into mitigation, adaptation, and resilience projects. The Bank has made a significant commitment to developing a forestry portfolio worth €1 billion by 2030, primarily utilizing blended finance for mainstreaming biodiversity and agri-business funding. Beyond this, FMO actively engages with various platforms related to the Agriculture, Forestry, and Other Land Use (AFOLU) sector, including DFCD and MFFP. Whilst recognising FMO’s efforts in this space, specific quantitative targets on reducing agricultural commodity-driven deforestation, overarching zero net deforestation commitments, and peatlands protection measures are all currently absent, preventing the Bank from being considered Paris aligned. |
| Nature based solutions | Biodiversity | Agriculture and livestock | Forestry |
| Nature-based solutions are to be included in adaptation, mitigation and resilience projects, according to the Bank’s Climate Action Plan. No further information on how this will be operationalised, besides the use of blended finance, was found. | FMO’s clients are required to comply with IFC Environmental and Social Standards, particularly for biodiversity protection. The Bank’s exclusion list also explicitly prevents FMO from financing any activity that may result in the “Destruction of High Conservation Value areas”. While specific biodiversity targets are absent, it is part of the green label and associated targets. Moreover, FMO collaborates with nature conservation organisations through providing funding and fostering stakeholder engagement. | FMO aims to transform the agri-business sector in its markets by promoting sustainable, resource-efficient, and resilient practices in agricultural supply chains. Its focus includes increasing local production, enhancing food access and reducing food waste. In order to become Paris aligned, the Bank should establish an agricultural commodity driven deforestation target. | The Bank has extensive investments in the forestry sector and is committed to building a €1 billion portfolio by 2030. FMO also manages the Mobilising Finance for Forest initiative launched by the UK government, aimed to unlock private sector financing to protect and restore forests. Despite green-labelled investments requiring anti-deforestation measures, FMO has no quantitative pledge to reduce deforestation, preventing a Paris aligned assessment. |
Nature based solutions
FMO explicitly mentions the need to include nature based solutions for mitigation, adaptation and resilience projects in its Climate Action Plan. The Bank employs a blended finance strategy for projects in which nature based solutions can be implemented, to mitigate investor risk and attract additional funding for these initiatives.
Biodiversity
FMO’s Sustainability Policy recognises the importance of ecosystems as “natural capital for the world economy” and therefore aims to prevent their degradation and to “conserve biodiversity in broadest sense.” FMO aims to invest €10 billion in SDG 13 (climate action) – which will include specific investment strategies related to adaptation, resilience and biodiversity. By 2030, the Bank has also committed to increase the volume of investments towards biodiversity, as stated in the Climate Action Plan. Despite not having specific biodiversity targets, it is worth noting that biodiversity is a component of the Bank’s Green Label investments (specifically under the “other footprint” category), which have an annual target.[1]
In terms of concrete actions, FMO will support the creation of coalitions with “key nature conservancy organizations, contributing to the understanding of the landscape approach, promoting community and stakeholder engagement”. In this context, FMO will build experience by directing investments towards biodiversity, with the overarching aim to “measure biodiversity in our portfolio, promote biodiversity positive investments, and engage with our customers on this topic”. There is no clarity on how FMO intends to build a pipeline of biodiversity investments.
In addition, the Bank requires all its “moderate” and “high” E&S risk direct investment clients to comply with the IFC Performance Standards and support them in ESG management. Moreover, financial intermediaries are in turn required to apply the IFC Performance Standards to any “high” risk clients or sub-investees they work with. Under IFC Performance Standard 6, customers must assess projects’ impact on ecosystems and develop strategies to protect modified (which have acquired significant biodiversity value), natural, and critical habitats, endangered species, and other ecosystem components. For activities that will potentially have negative impacts on biodiversity, customers are required to conduct an assessment covering direct and indirect impacts and to develop measures to avoid and minimize impacts where possible. When avoidance or minimization are not an option, “biodiversity offsets” are implemented to ensure outcomes with no net loss or net gain (required in the case of critical habitats) in biodiversity. Depending on the magnitude of potential impacts, customers might be required to develop a biodiversity action plan which includes monitoring and reporting on their performance in managing and conserving biodiversity.
In FMO’s 2022 Annual Report, the Bank identified 18 clients that are not managing biodiversity risk up to its expected standards, with insufficient monitoring and mitigation actions. To tackle this issue, FMO will “intensify customer monitoring, engage a biodiversity expert and use our leverage to improve the situation”. FMO also commits to considering different potential mitigation measures for its customers, tailored to their circumstances. In some instances, if failure by customers to meet the required standards of E&S risk management are deemed part of a wider financial problem, this may lead to FMO restructuring the loan or a full exit.
According to Jorim Schraven, Director of FMO’s Impact Department, “biodiversity is a topic and a problem that is coming in hard and fast”, becoming increasingly important from a regulatory and financial materiality perspective. As a next step in this space, FMO is considering looking into the possibility to introduce subsidy elements to capitalize on positive biodiversity externalities. The Bank is already working through blended finance to support projects that will have positive impacts on climate and biodiversity.
Agriculture and livestock
FMO sees the opportunity to “transform the agriculture sector… using sustainable, resource efficient and resilient practices and business models throughout agricultural supply chains”. For this, the focus is on supporting the increment of local production to reduce the reliance on exports, as well as improving food access and reducing food waste. However, no targets related to these specific goals were found.[2] FMO will also work with customers under the “Agriculture, Food and Water” (AFW) sector towards Paris Agreement goals and will support them on a just and inclusive transition. There is no clarity on how this will be operationalised by the Bank.
FMO does not yet have specific sector targets. However, during 2023 the Bank has been developing its investment-level Paris alignment approach to guide investments in the sector. It is unclear at this stage whether this sector guidance document will be made publicly available. FMO has also continued to support the improvement of customer level data collection, to better steer climate mitigation and resilience financing. The aim of this is for farmers to be better prepared and able to have more efficient responses for extreme weather conditions.
In addition to the generic climate risk methodology, FMO is developing a climate risk tool specifically designed to support clients in the agricultural sector in Africa, in cooperation with Wageningen University, Heineken, and the African Cotton Foundation. Another example of FMO efforts relate to Sembrar Sartawi, a microfinance institution (MFI) focused on financing rural and agricultural borrowers based in Bolivia. FMO has directly provided funds for the MFI to expand its operations to support micro-entrepreneurs in areas affected by climate change (as well as providing support its endeavours through the DFCD) providing a USD 6 million loan. Sembrar Sartawi analysed customers’ exposure to agro-climate risk and partnered with an insurance provider to ensure that farmers do not need to pay loans “upon losses derived from adverse climate risk events”.
In 2018, FMO published the Position Statement on Animal Welfare requiring its clients to align with the Bank’s approach to the topic, applying both to direct investments and intermediary lenders. In the context of this publication, Hans Bogaard, manager of the Agribusiness, Food and Water (AFW) Africa Team at FMO, commented that the Bank has a “limited number of livestock clients in its portfolio” but is committed to animal welfare across its investments.
Forestry
FMO has sought to facilitate forestry investments by committing “to build a portfolio of up to €1 billion by 2030” during COP27 as part of their “strategy to support climate action and biodiversity”. As of June 2023, the total “agribusiness, food and water” portfolio totals €1.28 billion. There is no clarity on how much of this is allocated to forestry.
The Bank’s forestry portfolio is composed of a combination of existing forest plantations and sustainable forestry management, non-timber forestry projects, and deforestation free commodities. FMO primarily uses blended finance in this area, as well as loans, guarantees and funding through equity investments. The Bank aims to “stimulate commercial investment to protect and restore tropical forests” using its expertise in successful E&G risk management.
FMO also leverages partnerships to promote sustainable forestry. A clear example of these efforts is the Mobilising Finance for Forests Programme (MFF), established jointly with the UK Government in 2021. The initiative aims to increase private investments in the forestry and agricultural sector by promoting sustainable value chains, while reducing deforestation and other detrimental land-use practices in developing countries. The Bank is also part of the DFCD, which operates in emerging markets to scale up climate change adaptation projects, including through a facility focused on land use and deforestation.
The Bank is part of The Global Innovation Lab for Climate Finance, an initiative focused on pushing forward “transformative financial solutions” to direct private investment in developing countries for advancing climate action. Initiatives supported through this framework include the Rural Prosperity Bond, a “unique debt instruments that will scale up restoration efforts,” providing credit and capacity building for land restoration, or The Fund for Nature, aimed at “financing nature-based solutions in deserved markets” and with a focus on carbon projects.
Targets
FMO’s application of the IFC Performance Standards involve relevant safeguards under PS6 limiting deforestation, particularly in the case of clients “engaged in the primary production of living natural resources”. However, these safeguards fall short of a target for zero net commodity-driven deforestation, and do not ensure zero net deforestation by activities outside this scope which could potentially have indirect impacts on forests. Despite this and according to FMO’s Green Methodology, pre-approved certifications for new green-labelled investments must comply with zero net deforestation and biodiversity loss measures. If the certification does not meet the criteria, it can still be eligible for the Green Label provided it is complemented with internal measures that prevent deforestation.
Exclusion list
FMO’s exclusion list includes refraining from the Destruction of High Conservation Value areas, defined as “… (1) elimination or severe diminution of the integrity of an area caused by a major, long-term change in land or water use or (2) modification of a habitat in such a way that the area’s ability to maintain its role is lost”. On top of this, and in accordance with the IFC EASS, land change and deforestation are assessed so that no investments will be made in projects that have negative impacts on the land after given cut-off dates. In projects that might lead to degraded land, restoration efforts might be required to offset the negative impacts of deforestation.
Recommendations:
- FMO should implement commodity related deforestation and zero net deforestation targets.
- As part of its Climate Action Plan commitment to measure and promote biodiversity investments, FMO should consider implementing a screening process for biodiversity-positive co-benefits across all investments, to support with monitoring its progress and the contribution of its portfolio in this regard.
[1] For more information on Green Labelled investments, please refer to the “Climate Strategy and Overarching Strategy” metric.
[2] E3G recognises that FMO has annual targets for the Green and Reduction of Inequalities (RI) labels containing the Agribusiness, Water and Forestry within, yet there is not enough data granularity to consider these as specific targets under agriculture and livestock. The annual target set equally for both labels during 2023 was €4.9 billion.