Letter from the Management Board
In the first six months of the year, global economic and political instability prevailed, particularly in FMO’s geographies. High inflation and increasing borrowing costs have made loan repayments and fundraising more expensive for developing countries. This negatively affected the livelihoods of many; the UN Development Programme estimates that the economic shocks of the past three years1 pushed 165 million people into poverty - using the US$3.65-a-day poverty line - bringing the total to 1.8 billion people.
Meanwhile, climate change continued to disproportionately impact the world’s poorest and most vulnerable. The Horn of Africa, which is experiencing its longest and most severe drought on record, is just one example. FMO is committed to a just and inclusive transition, in which environmental, economic, and social aspects are addressed holistically. While all governments need to adhere to agreed climate goals, we believe countries that have historically emitted the most must assume the highest responsibility and take decisive action.
Growing impactful business
Last year, we updated our strategy towards 2030 in order to maximize our impact. Underpinning this ambition, we have set ‘growing impactful business’ and ‘organizational development’ as priorities for this year, while a third element is ensuring FMO’s foundations remain solid.
Our results for the first half of 2023 show an increase in volume compared to the previous year. We built up a pipeline of opportunities that resulted in €1,079 million in total new investments, of which €495 million went towards green projects and €510 million towards reducing inequalities. Although we were able to source more opportunities with a greater contribution to the SDGs, investments in least developed countries continued to fall behind. This is due to the previously mentioned political unrest and macroeconomic instability.
A few examples of our impact investments in 2023 include:
Khan Bank Mongolia issued the first-ever green bond in the country, with FMO investing €35 million in the US$ 60 million, five-year bond. The bank will grow its climate portfolio by funding projects that support renewable energy, energy efficiency, green buildings, green mobility, and climate-smart agriculture in Mongolia.
Supporting Taprobane Seafoods, a Sri Lankan company that sustainably produces vannamei (whiteleg) shrimp. The US$15 million loan will help to rehabilitate abandoned shrimp farms, renew hatcheries, and set up eco-friendly processing factories. The loan was financed through Dutch government funds Building Prospects and Dutch Fund for Climate and Development.
Walo Storage in Senegal. This first battery storage project in West Africa will bring much-needed stability to the local grid and reduce power outages. FMO provided a 16-year loan of €11 million from our own balance sheet (FMO-A) and a 19-year loan of €8 million from the Dutch government Access to Energy Fund.
Investing in Arohan Financial Services, a microfinance institution that currently serves around 2 million low-income female borrowers - mostly in economically less developed regions of Eastern and Northern India. The equity investment (US$11 million equivalent in INR) is expected to catalyze growth of Arohan.
Enabling Faten Palestine for Credit and Development to increase access to finance for un(der)banked groups through a US$10 million loan and a NASIRA risk sharing facility. Despite operating in a very challenging environment, Faten is the largest microfinance institution in the West Bank and Gaza, providing crucial access to finance in the area.
Supporting ACA, an Argentinian co-operative of co-operatives, during the difficult macroeconomic circumstances in the country. A syndicate of US$80 million provides ACA, which is owned by 50,000 farmers, with the stable hard currency working capital it needs to export grains and oilseeds.
Strengthening partnerships is an essential part of our strategy. In this context, our extended cooperation with the European Union represents a significant and strategic step. In mid-2022, the European Commission (EC) launched the European Fund for Sustainable Development Plus (EFSD+). In recognition of the success of two previous EC guarantee programs (NASIRA and FMO Ventures Program) that we set up, we have received approval for three new proposals totaling €475 million. This amounts to a significant portion of EFSD+ funding. Additionally, we have jointly secured approval for nearly €470 million of EFSD+ funding proposals, which will be delegated to our partners for execution.
Another highlight of the first half of this year is developing our approach to Market Creation. FMO seeks to join forces with different players that support nascent businesses in emerging markets and enable ecosystem development. Parallel to this, our FMO Ventures Program continued to build partnerships and ecosystems that support start-ups, specifically in Ghana, Morocco and Tanzania.
Ensuring a solid foundation
In the first six months of the year (the period ending 30 June 2023), our net profit amounted to €44 million. The movements in the US dollar/Euro exchange rate and devaluation of local currencies against the USD, had the biggest impact on our financial performance, resulting in a downward adjustment of our private equity portfolio. Loan provisions were lower than the corresponding amount last year, then largely impacted by exposures in Ukraine, Sri Lanka and Myanmar. The non-performing loans ratio on 30 June was 9.9%. The common equity tier 1 (CET 1) ratio at the end of the reporting period was 23.21%.
To ensure FMO continues to comply with regulations, several work streams and projects are currently ongoing. For instance, we are in the process of implementing the Corporate Sustainability Reporting Directive (CSRD) and we intend to align with the European Central Bank's expectations in relation to climate-related and environmental risks by the end of 2024. We will be required to publish our first report in accordance with the CSRD in 2025, based on the company's 2024 financial year performance. We are also preparing for alignment with the international banking standards Basel IV, which need to be realized gradually towards 2030.
As progress towards our focus SDGs can be severely hampered by financial economic crime (FEC), we take our role as gatekeeper to the financial system very seriously. In 2020, we launched the Financial Economic Crime Enhancement program to ensure full compliance with the Anti-Money Laundering and Anti-Terrorist Financing Act (in Dutch: Wwft) and the Sanctions Law. We finalized this program at the end of 2021, including the related KYC file remediation.
In 2022, we initiated a follow-up on the recommendations the Dutch Central Bank (DNB) gave in its conclusions and observations. This included acknowledgement of the improvements we made. We have further enhanced our KYC capabilities by embedding the KYC department in the frontline of the investment process, giving KYC a natural position in any project decision.
As a result of the file remediation, we reported a limited number of incidents to DNB at the end of 2021 and the beginning of 2022. These involved late notifications of unusual transactions to the Financial Intelligence Unit (FIU). DNB reviewed these late notifications and the related KYC files. As a result, DNB decided on enforcement measures. FMO has requested DNB, by means of objection, to reconsider these measures.
Organizational development
To increase our impact and meet the expectations of our stakeholders, we continued to strengthen and streamline our organization. The recruitment of new colleagues progressed well and we prioritized employee wellbeing and engagement. Efficiency, meanwhile, is also high on the agenda. Projects were put in place that will make the administration within the investment process more user friendly, and we began implementing an agile way of working on IT projects, while outsourcing our IT-system to state-of-the-art datacenter, increasing our overall flexibility.
Effectory, an independent provider of employee feedback solutions, conducted our bi-annual employee engagement survey. Based on this, they classified FMO as a ‘World Class Workplace’, awarded only to organizations that score above the benchmark for engagement and employership. The survey showed that engagement levels and work satisfaction are improving, in contrast to the overall labor market, which continues to experience negative effects from the pandemic. Our employees are proud of our vision and goals, as well as the atmosphere and trust within their team. We are also on the right track regarding efficiency and cross team collaboration, both areas of improvement.
Looking ahead
We look forward to the Future of Finance – our bi-annual flagship event – at the beginning of October. During this first edition following the pandemic, we will bring together financial institutions, impact investors, and other partners from over 60 countries, to share and expand knowledge on inclusive climate finance and the role of technology, data and AI in providing financial services.
Although we are pleased with the good results in the first half year with respect to impactful investments, we recognize that the outlook for the rest of 2023 remains uncertain due to the fragile global economic and political situation in some of our markets. Still, while achieving the necessary growth and maximizing our impact will be challenging, we see it as our role to be countercyclical and focus on the long term, to invest when others shy away. In light of the challenges that lie ahead, a just and inclusive transition is not an option, but a necessity, and we will do our utmost to contribute to this goal.
Responsibility statement
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 2023 condensed consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit of FMO and its consolidated undertakings;
This Interim Report 2023 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 financial statements 2023; and
This Interim Report 2023 includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
The Hague, August 10, 2023
Fatoumata Bouaré, Chief Finance & Operations Officer
Franca Vossen, Chief Risk Officer
Huib-Jan de Ruijter, Co-Chief Investment Officer
Michael Jongeneel, Chief Executive Officer
Peter Maila, Co-Chief Investment Officer