Letter from the Management Board
The effects of the pandemic have continued to dominate the headlines in the first half of 2021. The world has entered a new phase of the pandemic with the rollout of the COVID-19 vaccines and new variants of the virus. One positive outcome of the pandemic is that the short development time of these vaccines has shown that it is possible for countries and international organizations to rally together to achieve a common goal. An approach also required in addressing two of the most persistent global issues we face today: the climate crisis and inequality.
While we welcome the systemic change and steps taken towards addressing the climate crisis, including the new EU regulations on sustainable finance for which FMO is getting ready, the recent IPCC Report is a stark reminder that immediate action is needed. As UN Secretary-General António Guterres put it: "greenhouse‑gas emissions from fossil-fuel burning and deforestation are choking our planet and putting billions of people at immediate risk. Global heating is affecting every region on Earth, with many of the changes becoming irreversible". The issue of inequality is also reaching critical levels, further amplified by the lack of access and uneven distribution of vaccines in many of the markets in which we operate. These topics will, therefore, remain front and center in FMO's 2030 strategy review.
The IMF calls for multilateral action to diminish the increasing divergence across countries, caused by the pandemic, and to strengthen global economic prospects. In 2021, emerging markets and low-income countries are expected to grow by 6.3% and 3.9% respectively, adjusted downward from earlier projections due to the resurgence of (new) variants of the virus and a slower-than-anticipated vaccine rollout in these countries. The IMF warns for downside risks. Recovery, even among countries currently reporting low infection rates, is uncertain as the slow vaccine rollout will allow the virus to mutate further. Developing economies could also face tighter external financial conditions, for instance if prolonged inflationary pressures lead to a reassessment of the monitory policy outlook in advanced economies, which could severely set back their recovery and drag drown global growth.
Supporting customers and forming new partnerships to scale up impact
Against this context, FMO is more determined than ever to drive transformational impact in developing economies. The NASIRA Risk Sharing Facility is an important tool in the Financial Institutions sector to unlock lending to underserved groups. Technical Assistance (TA) is an essential part of this offering. Through the NASIRA TA Facility, we supported Sasfin Bank (South Africa) to strengthen its internal risk management capabilities to effectively provide finance to businesses owned by women and youth and those that have been impacted by the pandemic.
We are increasing our investments in agri-tech in the Agriculture, Food & Water sector. Through FMO’s Ventures Program, we provided an additional US$ 3 million of risk capital to WayCool Foods & Products, an AgriTech company that aims to build India’s largest, tech-enabled, food logistics & distribution platform. By transforming the fragmented Indian agri-space, farmers’ incomes can improve, food wastage is reduced, and consumers have access to higher quality produce.
In the Energy sector, we are increasing our focus on (green) transmission and distribution. FMO signed a US$ 5 million top-up of its existing senior loan to Greenlight Planet Inc., a diversified off-grid solar company with a presence across the full value chain and one of the leaders in this sector. FMO’s local currency facility will help the company deploy more solar home systems across Sub-Saharan Africa on a pay-as-you-go basis and, as such, provide affordable energy to underserved and rural communities.
We continue to join forces with others to scale up impact. FMO Investment Management launched a new US$ 150 million compartment for the NN-FMO Emerging Markets Loans Fund with one single investor, demonstrating the continued interest among investors to invest alongside FMO. Together with DFC, the U.S. International Development Finance Corporation, we also launched the DFC-MASSIF COVID-19 Response Co-Financing Facility. This US$ 75 million facility seeks to bring liquidity to financial intermediaries to support micro-, small-, and medium-sized enterprises impacted by the COVID-19 crisis and promote new investment to support economic sustainability in developing countries. Furthermore, the UK government entrusted us to manage their ‘Mobilising Finance for Forests’ program aimed at unlocking private sector investment in projects that protect and restore tropical forests across Africa, Asia and Latin America.
Full compliance with FEC / KYC laws
In 2020, we launched the Financial Economic Crime (FEC) Enhancement program to demonstrate full compliance with the Anti-Money laundering and Anti-Terrorist Financing Act (in Dutch: Wwft) and the Sanctions Law by the end of 2021, as agreed upon with DNB. In the past six months, this has received FMO’s full attention and will continue to do so moving forward. We have freed up temporary resources to support the remediation efforts to align the Know Your Customer (KYC) files with best practices and (inter)national standards in line with the agreed upon deadline. Approximately, 120 FTE of internal and external professionals are currently fully dedicated to working on this. At the end of June, we achieved 94% of our half year target. Meanwhile, we continued to strengthen internal processes, policies and the internal organization. We implemented our updated FEC operations framework, including transaction monitoring and automated daily screening of customers. In addition, we defined the target end-state for a new KYC department and started recruitment for key positions. Furthermore, we initiated additional mandatory trainings for in-depth KYC topics to improve the quality of assessments.
Ensuring financial sustainability
In July, we decided to further intensify our efforts to ensure timely completion of the FEC enhancement program. Among others, by temporarily halting new business activities with existing customers, following an earlier decision to limit business activities with new customers. In the short-term, this means we will accept a smaller pipeline of projects and that, ultimately, we will not achieve year-end portfolio targets. This has not yet impacted the financial results, which show an improvement in the first half of 2021. In 2020, following the COVID-19 pandemic, we reported a loss of € 205 million resulting from a substantial devaluation of FMO’s private equity portfolio and higher impairment levels. In the first half of 2021, this picture has improved. Global equity prices partially recovered across sectors and geographies, leading to a net profit of € 198 million. The USD appreciation during the first half of 2021 also had an upward effect on the financial performance of our equity investments. Although global conditions remain uncertain, deterioration in the credit quality of our customers has been limited and few new loan defaults have occurred. The impact of the COVID-19 pandemic on the non-performing loan (NPL) ratio remains relatively limited. The NPL ratio increased from 9.1% in 2020 to 9.8% in the first half of 2021, which is mainly explained by new NPLs in Myanmar, because of the military coup last February. Furthermore, revised GDP forecasts, have had a positive effect on the impairment levels.
FMO’s capital buffers exceed the minimum required by the Dutch Central Bank and the higher requirements defined by our internal risk appetite. At the end of June, our total capital ratio was 25.0%, which remains above the combined ratio of the SREP minimum and FMO’s internal requirements.
Investing in our organization
We greatly appreciate the resilience and dedication of our employees as we stepped up our efforts on KYC and continued to work remotely. In the past six months, we increased our focus on employee wellbeing to maintain and build resilience and positively influence our workplace culture and experience. Several initiatives have been launched, including a new policy to assist home office set-up, options to temporarily set up office overseas, learning programs designed to maintain resilience and (pulse) surveys to identify areas for improvement. Lastly, our culture conversations are ongoing to ensure we continue to openly address topics like inclusion, unconscious bias and constructive feedback.
In June, our Supervisory Board announced several changes in FMO’s Management Board and Supervisory Board. From September 1st, we will welcome Michael Jongeneel as our new CEO. Michael joins from Bain & Company, an international consulting firm, where he was partner in the Amsterdam office and the firm’s global lead for sustainable finance. As of September 1st, Linda Broekhuizen will depart FMO. It is with mixed feelings, she says: “It has been a privilege to have partnered with so many inspiring entrepreneurs all over the world, and after 21 years the time has come for me to pursue other opportunities outside FMO.’’ We thank Linda for the impact she has made on our customers as well as our organization and wish her well in her future endeavors. Following in her footsteps, Huib-Jan de Ruijter has been appointed as Chief Investment Officer. Fatoumata Bouaré has been appointed for a second term as Chief Risk & Finance Officer. Koos Timmermans, member of the Supervisory Board, was also appointed for a second term.
Outlook: getting ready for the future
Our financial forecasts suggest that the current upward trend in global equity prices will continue and, as such, that FMO will exceed the budgeted net profit by year-end. However, we continue to face uncertainties around COVID-19 and currency movements in the market, which could negatively influence our year-end results. The long-term effects of COVID-19 since the start of the pandemic on the NPL levels are currently unknown. In addition, the lower new investment volumes realized in 2020 and 2021 will have a longer-term impact on FMO’s financial results. Therefore, later this year, our focus will be on rebuilding FMO’s portfolio and on managing our resources effectively to achieve this goal as well as to ensure we continue to comply with (new) regulatory requirements.
In the meantime, we have intensified our engagement with our stakeholders including the Dutch State, regulators, NGOs, customers, and partner organizations in taking important steps to prepare for the future. First, we launched our Position Statement on Fossil Fuels in Direct Investments. FMO commits to further reducing fossil fuel investments by no longer directly investing in upstream or mid-stream stand-alone fossil fuel-related activities. There is a five-year transition period in which we will phase out direct investments in integrated mid/down-stream fossil fuel activities for power generation.
Second, following approval from the Dutch Senate in July, Invest International was officially incorporated on 27 July 2021. Invest International will be fully operational on 1 October 2021, as of which FMO’s NL Business team and activities will transfer to this new entity. FMO will hold 49 percent of shares, the Dutch state the majority stake with 51 percent of shares. Invest International will be the one-stop-shop for financing international activities of Dutch-based companies abroad. FMO’s mandate will continue to complement these activities, which offers ample opportunity for collaboration in the future.
Several complex projects will continue to receive our full attention. In July, we learned that the CEO of our former customer DESA was convicted of involvement in the murder of Berta Cáceres, human rights activist and chair of COPINH, the organization that opposed the construction of the hydroelectric facility Agua Zarca. Learning from this experience and from other complex projects is an ongoing process, and these learnings continue to feed into how FMO conducts its business.
In the coming months, all eyes will be on three key global events that will bring the world together; the decisions taken there will shape our collective future. Through the UN Food Systems Summit, The COP15 on Biodiversity and COP26 on Climate, we hope the feeling of togetherness will translate into action that the world needs. As for FMO’s part, we will be ready to fully contribute as impact investors: through empowering entrepreneurs, reducing the inequality gap and fighting climate change.
In accordance with Article 5:25d(2)(c) of the Dutch Financial Supervision Act (Wet op het Financieel Toezicht) we state that, to the best of our knowledge:
The 2021 condensed consolidated interim accounts give a true and fair view of the assets, liabilities, financial position and profit of FMO and its consolidated undertakings;
This Interim Report 2021 includes a fair overview of the important events that have occurred during the first six months of the financial year, and their impact on the condensed consolidated interim accounts 2021; and
This Interim Report 2021 includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
The Hague, August 12, 2021
Fatoumata Bouaré, Chief Risk & Finance Officer
Huib-Jan de Ruijter, Chief Investment Officer
Linda Broekhuizen, Chief Executive Officer a.i.