EU Taxonomy
FMO is required to publish non-financial information under the Non-Financial Reporting Directive (NFRD). FMO discloses how and to what extent investments are aligned with economic activities that qualify as environmentally sustainable under the first two defined environmental objectives (climate change mitigation and adaptation) of the EU Taxonomy Regulation (Taxonomy). Moreover, FMO reports on eligibility in line with the Taxonomy for the remaining four environmental objectives as of this year. Alignment with the remaining four objectives will be disclosed in the Annual Report covering the financial year 2025 (reported in 2026).
Recognizing the importance of financing the transition to a sustainable economy, FMO supports the EU Taxonomy’s objective to enhance transparency and address greenwashing by providing clear criteria and definitions for what constitutes environmentally sustainable economic activities.
FMO closely follows the developments related to the sustainable finance regulations in the EU and has been disclosing under EU Taxonomy since 2021. Despite being an EU-based organization, FMO’s core business focuses on investing in low and middle-income countries. As FMO invests mostly outside of the EU, we deal with counterparties that do not fall within the scope of the NFRD and, hence, are not required to disclose their Taxonomy eligibility and alignment. As the current Taxonomy regulation stipulates that mandatory disclosure on eligibility and alignment must be based on actual information disclosed by financial or non-financial undertakings subject to the NFRD, FMO reports that zero percent of its balance sheet in 2023 is Taxonomy eligible and aligned (2022: zero percent Taxonomy eligible). As such, we report a Green Asset Ratio (GAR) of 0 percent.
The Taxonomy regulation requires FMO to disclose a breakdown of the different asset classes held on its balance sheet. In accordance with the European Commission’s guidance, exposures to central governments, central banks, supranational issuers, and derivatives are excluded from the calculation of Taxonomy eligibility and alignment. Also, as mentioned, exposure to non-NFRD undertakings, which constitutes FMO’s investment portfolio in low- and middle-income countries (LMICs) are not considered either. 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 to a large extent not Taxonomy eligible as they do not finance a specific economic activity. Some securities held in FMO’s treasury portfolio might be taxonomy eligible but FMO does not report on these assets as such as it is not considered to be material in the context of FMO’s core business and contributions to the climate-related objectives.
In addition, the Taxonomy regulation requires FMO to disclose information on its assets under management. As mentioned in the 'Consolidated financial statements' in the section 'Related party information', in FMO's role of program manager for the assets under management, FMO holds positions with the government programs. Considering the mandate of these funds is to invest in LMICs, FMO reports 0 percent GAR for these assets, for the same reasons described above.
Challenges in implementation
FMO supports the intention of the EU Taxonomy to redirect capital flows towards sustainable development investments. However, when analyzing the regulatory framework, gaps have been identified preventing the use of this framework as a steering instrument for sustainable activities outside of the EU.
Most notably, the mandatory reporting under the EU Taxonomy can only be reported for NFRD compliant counterparties. Since FMO invests outside of the EU, the investment portfolio cannot be assessed for its Taxonomy eligibility and alignment for mandatory disclosures. As these entities do not disclose in line with the NFRD, they are excluded from the numerator of the Green Asset Ratio and related templates.
Moreover, the direct application of the Taxonomy with regards to investments in LMICs is limited given that its requirements and thresholds have been developed with the needs of European markets in mind. For example, the Taxonomy’s “Do No Significant Harm” (DNSH) principle refers to EU laws and regulations which promote consistency within the European regulatory framework. However, this presents a challenge for European investors investing in LMICs where different regulatory frameworks apply.
Additionally, data and disclosure requirements might be challenging to deliver by companies located in LMIC at the level required by the Taxonomy regulation.
If these challenges are not addressed, the EU Taxonomy could not function as an effective tool to reorientate capital flows towards sustainable investments in LMICs.
Impact management at FMO
In order to manage and steer capital towards sustainable investments, an internal approach has been developed fitting FMO’s business model while leveraging international standards. In particular, FMO's climate action plan provides an overview of FMO's climate-related objectives. The plan provides a framework for the actions FMO will take to fulfil its Sustainable Development Goal 13 objectives (Climate Action), including increasing our investments in climate change mitigation, adaptation and resilience and biodiversity, as set out in FMO’s Strategy 2030.38 FMO assesses the impact of its green investments relative to its climate mitigation, climate adaptation and other footprint reductions, based on international standards such as the MDB Common Principles, by using its Green label as part of FMO’s broader Impact Management Framework.
FMO mitigates possible negative social and environmental impact by screening investments using its position statements on human rights, land governance, fossil fuels and coal as well as its exclusion list39, which defines the type of activities in which FMO does not invest. Moreover, FMO manages environmental and social risks as per the IFC Performance Standards it has adopted as its operating standard. Further examples of the standards that FMO applies align with good practices relating to responsible investing include the EDFI Principles for the Responsible Financing of Sustainable Development and the Operating Principles for Impact Management. In addition to FMO’s contribution to SDG 13, a large portion of its investments is focused on SDG 10 (Reduced Inequalities) and SDG 8 (Decent Work and Economic Growth).
FMO will continue to classify assets based on its internal framework and keep monitoring sustainable finance regulatory developments while it constructively engages with relevant stakeholders with a view to making the Taxonomy more inclusive for companies operating in LMICs, recognizing the different contexts and characteristics of countries outside the EU.
Template for the KPIs of credit institutions
For 2023, FMO discloses Taxonomy eligibility for all six environmental objectives and Taxonomy alignment for climate adaptation and mitigation following Annex VI of the Delegated Regulation (EU) 2023/2486 of 27 June 2023 (Environmental Delegated Act).
Considering the applicability of the EU taxonomy for FMO’s business model, aligned exposures are reported to be zero as described at the beginning of this chapter.
FMO performed a high-level assessment to determine the materiality of exposures that might positively contribute to the GAR and be classified as taxonomy eligible or aligned. The results showed that, with respect to our Treasury portfolio, 0.11 percent of the total assets might positively contribute to the GAR. With respect to the investment portfolio, FMO has some investments in entities (mainly funds) with European’s headquarters. We performed a high-level assessment of the indirect underlying exposures and six customers might have an underlying EU exposure. Of these six customers, only one reported on EU taxonomy eligibility in 2022, having 0.04 percent of their assets classified as taxonomy eligible. Accordingly, the amounts were not considered to be material for further assessment. A similar analysis was done for the assets under management, where only one customer has a legal entity located in EU, which does not report in line with the NFRD. This analysis led to the same conclusion as for FMO's investment portfolio.
In addition, FMO discloses the template on Taxonomy aligned, eligible and non-eligible exposures in nuclear and fossil gas. For the purpose of Taxonomy reporting, the regulation stipulates that mandatory disclosures must be based on actual data disclosed by financial or non-financial undertakings following NFRD. Considering FMO invests in LMICs and the vast majority of its exposures are outside of the EU, actual information disclosed according to the NFRD is not available. In the context of the EU Taxonomy, FMO therefore discloses that it has no exposure in fossil gas.
That said, FMO investments in non-NFRD undertakings has resulted in direct exposures to fossil gas activities. These are mainly the result of previous investments made prior to releasing, in 2021, of our Position Statement on Coal and Phasing out Fossil Fuel in direct investment in upstream or mid-stream standalone fossil fuel related activities. Nuclear activities are on FMO’s exclusion list. None of these exposures are anyway reported as Taxonomy eligible or aligned.