EU Taxonomy

As FMO invests outside the EU, 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 zero percent of its balance sheet in 2022 is Taxonomy eligible (2021: 0 percent). 

The regulation further requires that we disclose a breakdown of the different asset classes on FMO's balance sheet (see table below). In accordance with the European Commission’s guidance, we excluded exposures to central governments, central banks and supranational issuers, as well as derivatives from the calculation of Taxonomy eligibility. Also, as explained above, we didn’t consider exposures to non-NFRD undertakings, which constitutes FMO’s entire investment portfolio in emerging markets. Finally, the remaining FMO assets – including cash and cash-related assets held in FMO’s liquidity portfolio, tangible and intangible assets, and tax assets – are not Taxonomy eligible as they do not finance a specific economic activity.   

As FMO’s entire portfolio cannot be assessed for its Taxonomy eligibility, no strategy or weighing has yet been developed for the financing of Taxonomy-aligned activities. Until there is more clarity on the application of the Taxonomy on activities of EU companies outside the EU, we will continue to classify assets, steer, and report based on our Green label. At the same time, FMO will review developments in the Taxonomy framework 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' criteria in emerging markets. 

FMO sees a risk that it could become harder to invest in emerging markets if institutions are not given the flexibility and time to align with the Taxonomy. This could send an incorrect signal that investing in emerging markets is not sustainable. As a response to these concerns, the European Commission has launched a High-Level Expert Group (HLEG) on scaling up sustainable finance in low and middle-income countries. The group's task is to identify challenges and opportunities of sustainable finance in partner countries and provide recommendations to the European Commission on how to scale up funding from the private sector. 

A study by the European Commission that will be released in 2024 will determine how and when non-NFRD exposures will be included in the mandatory disclosures. FMO is urging stakeholders to make the Taxonomy more inclusive for companies operating in emerging markets. Based on this study, our disclosures could change materially in the future. We are awaiting the screening criteria for the remaining four environmental objectives^[1], the social Taxonomy, and the work on significantly harmful and low impact activities to determine what else is eligible. Furthermore, a large portion of our investments is focused on SDG 10 (Reduced Inequalities) and SDG 8 (Decent Work and Economic Growth), but these fall outside the scope of the current environmental Taxonomy. 

• 1 The remaining four environmental objectives specified by the EU taxonomy are: pollution prevention, circular economy, sustainable use of water and marine resources and healthy ecosystem.