External environment
In 2018 we saw the world’s two prime challenges – climate change and inequality – become even more pressing.
The UN Intergovernmental Panel on Climate Change (IPCC) released a landmark report saying the world has only 12 years to keep global warming under 1.5°C, or risk catastrophic floods, heat, drought and poverty for hundreds of millions of people. Meanwhile the 2018 COP24 climate conference in Poland, which follows up on the 2015 Paris Climate Agreement, failed to reach an agreement on how countries will step up their emission cuts. Current targets put the world on a path towards 3°C of warming and new targets will only be discussed in 2020. COP24, however, did result in an agreement on how governments will measure, report on and verify their emissions-cutting efforts.
Recent reports also confirm the need to reduce inequality, which in turn implies the availability of jobs. The World Inequality Report 2018 showed that although the poorest half of humanity captured 12% of global income growth between 1980 and 2016, the top 1% captured 27%. Oxfam’s ‘Public good or private wealth’ report puts it in concrete terms: the wealth of the world’s 2,208 billionaires increased by $2.5 billion per day in 2018, while 3.4 billion people were living on less than $5.50 a day. Improving the lives of all these people is only possible if the world’s economies are able to create stable and well-paid jobs, something FMO focuses on through its investments. The number of required jobs is high and increasing, though, due to growth of the global population.
In 2018 we also saw slow progress towards a more universally shared method of reporting on impact. In 2018 the UN suggested ways that corporations should report progress on the 17 SDGs. By and large, however, development finance institutions and other stakeholders each have their own way of measuring and reporting impact, making it hard to determine which approaches are most useful. FMO is actively encouraging the financial industry to try to align its approaches.
While progress on climate change and inequality is frustratingly glacial, technological developments are occurring at a breakneck pace. Around us we are seeing incredible developments in artificial intelligence, quantum computing, data analytics, robotics, drones, blockchain, 3D printing, and the fusion of biology and technology. We believe that some of these technologies have the power to change the fortunes of underserved people, if these developments can be scaled up to the benefit of all.
Blended finance
More funding is becoming available towards the realisation of the SDGs as stakeholders are recognising there is an urgent need to act. On the one hand, the capital of existing multilateral banks such as the World Bank and the IFC is being strengthened. On the other hand, new multilateral banks are being designed, such as the European Investment Bank’s EU Bank for external Investment and Partnership.
Meanwhile, public institutions such as the European Commission and the Green Climate Fund are increasing their capacity to blend public resources with private capital. We see this as an opportunity to pursue higher risk and higher impact projects in our focus sectors and mobilise commercial parties with structures that make risks acceptable to them.
To ensure the effective and efficient use of blended finance and avoid market distortion or crowding out private capital, multilaterals and DFIs need to align their blended finance approaches. Given our strategic goal to crowd-in commercial investors, FMO actively engages in this discussion. We do so in co-operation with our peers through EDFI, the association of European Development Finance Institutions.
Dutch foreign policy
In May 2018, the Dutch Ministry of Foreign Trade and Development Cooperation published its new vision on sustainable development. In a report entitled ‘Investing in Global Prospects; for the world, for the Netherlands’, the Ministry describes how it aims to support efforts to tackle the root causes of poverty, migration, terrorism and climate change in unstable regions in the Sahel, the Horn of Africa, the Middle East and North Africa.
FMO’s 2025 strategy and four-year plan align with this new policy, by including investments in the European Neighbourhood, and by supporting youth, women, refugees and their host communities. We believe that this area in general and these groups in particular have tremendous potential for having a positive impact on all our three SDGs.
That is why with other stakeholders we are contributing to the development of an Africa strategy for the Dutch private sector and why we support the investments of Dutch businesses in emerging markets through our NL Business activities, for which we will set up a new institution with the Dutch state.
Transparency and accountability
Local communities, NGOs, governments and the media increasingly expect development banks and their partners to pay attention to and communicate transparently about the full impact of their investments. This is key to truly fostering local prosperity.
FMO’s environmental, social and governance (ESG) management procedures ensure that, where necessary, local communities are consulted early on in the project development process, negative effects are sufficiently mitigated, and local communities genuinely benefit from our investments. Stakeholders also expect early disclosure of project information.
FMO acknowledges this need for transparency and accountability. To this end we have implemented our Sustainability Policy and Disclosure Policy and we have ongoing dialogue with stakeholders such as NGOs and the Dutch government. By tapping into the expertise of NGOs, we enrich our understanding of local circumstances and inform our decision-making and policy development.
Regulatory change
National and international regulations impact the banking activities of FMO, such as how performance is reported or limiting certain equity investments. In 2018 FMO implemented IFRS 9 and this significantly impacted the volatility of our reported financials. Moreover, the proposed amendments to the CRR (CRR-2) and the implementation of Basel IV into European legislation could tighten the capital requirements of FMO and, in turn, lower our ability to provide high risk capital, as well as make us less competitive than parties not subjected to a regulatory regime. The final proposed text, however, does include an exemption for the risk-weighted assets rules for multi & bilateral developments’ private equity investments in developing countries. As these regulations are still subject to debate and approval at EU level, it remains uncertain how they will ultimately affect us.
Also in 2018 the European Commission launched the Action Plan on Financing Sustainable Growth to encourage green investments and mitigate the risks to investors posed by climate change. Measures include a unified EU classification system, regulations on how financial market participants should integrate ESG in their decision-making, and a new market standard on sustainability disclosures.
It is difficult to predict the timing or form of any other future regulatory or enforcement initiatives, so we closely monitor developments in the legislative process. Please refer to the Risk Management section for further details.