FMO is required to report in line with the Non-Financial Reporting Directive (NFRD). Therefore, we are required to disclose on the Taxonomy Regulation (Taxonomy) and associated KPIs for financial institutions. This starts in 2021 by reporting on Taxonomy eligibility, which is done by determining whether an investment falls within one of the sectors covered by the first two defined environmental objectives (climate change mitigation and adaptation).
As all of FMO’s investments are made outside the EU, in EMs, none of our counterparties are in scope of the NFRD and, as such, are not required to disclose their Taxonomy eligibility or alignment. As the regulation stipulates that the mandatory disclosure on eligibility must be based on actual information disclosed by financial or non-financial undertakings, and estimates are not permitted, FMO reports that 0% of its balance sheet is Taxonomy eligible.
The regulation further requires that we disclose a breakdown of the different asset classes on FMO's balance sheet. The following assets were excluded from the analysis:
15% of FMO’s total assets consisted of exposures to central governments, central banks, and supranational issuers;
3% of assets consisted of derivatives;
78% of FMO’s total assets, were to non-NFRD undertakings (the entire investment portfolio in EMs).
These assets were considered in the analysis:
4% of assets were not Taxonomy eligible as they did not finance a specific economic activity, including cash and cash-related assets held in FMO’s liquidity portfolio, tangible and intangible assets, and tax assets.
As FMO’s entire portfolio is not Taxonomy eligible, no strategy or weighing has yet been developed for the financing of Taxonomy-aligned activities. Until there is more clarity on the application outside the EU, FMO will continue to classify assets, steer, and report based on its Green label. At the same time, FMO will review developments in the Taxonomy to determine what can be aligned at each stage and fill data gaps where required. We expect alignment will be more challenging in some sectors than others and will depend on the applicability of sector-specific 'do no significant harm' (DNSH) criteria in EMs. FMO sees a risk that it could become harder to invest in EMs if institutions are not given the flexibility and time to align with the Taxonomy. This could send an incorrect signal that investing in EMs is not sustainable.
How and when non-NFRD exposures will be included in the mandatory disclosures is pending a European Commission study to be published in 2024. FMO is advocating to stakeholders that the Taxonomy be more inclusive towards companies operating in EMs. Based on the results of this study, FMO’s disclosures could change materially in the future. FMO is awaiting the finalization of the four other environmental objectives, the Social Taxonomy and the work on significantly harmful and low impact activities to determine, over time, what else is eligible. Furthermore, a large portion of FMO’s investments is focused on SDG 10 (Reduced Inequalities) and SDG 8 (Decent Work and Economic Growth), but these fall outside the scope of the Taxonomy.