Lessons learned

In 2023, FMO carried out several studies that will further inform the implementation of the Strategy 2030. In this section, we highlight several lessons learned from four of these studies. The studies reviewed the effectiveness of funds and investments with respect to achieving development objectives, including the degree of additionality, which is key to FMO’s mandate. More information on these and other studies can be found in the FMO Reporting Center on the FMO website.

Market creation

FMO completed a corporate evaluation and a development grants evaluation to gather lessons learned from its portfolio to inform the operationalization of market creation, a new strategic focus area in our Strategy 2030. The evaluations examined over 200 internal projects, with deep dives on 28. Around half of the projects were found to have links to market creation.

The investments analyzed in both evaluations were often considered additional. For example, one intervention addressed a lack of alternative funding available to SMEs and another addressed a lack of funding and ESG capacity to successfully develop an energy project. Results showed that 91 percent of grantees reported that there were insufficient or no funding sources available when FMO provided the grant. A full 100 percent of grantees reported that they needed funding at the time of receiving the grant, and that the grant was at least somewhat necessary for implementing project activities.

The evaluations identified the following lessons:

• Market creation cannot be achieved by doing more of the same and we cannot do it alone. We need to work with partners with specific strengths and expertise that are complementary to those of FMO.

• It is important to understand what prevents markets from developing and this requires local knowledge. This means FMO can build on its strengths, such as sector initiatives that seek to raise ESG standards across a country, rather than one company at a time.

• Market creation takes time to materialize. Hence, time horizons should be set accordingly in the design, planning, resourcing, and financing (by public partners) of each intervention.

• Market creation is a new and evolving field that requires constant experimentation and adaptation. This requires a learning agenda that addresses both internal and external barriers to market creation and a way to measure progress.

Decent Work

Labor risks and opportunities are highly context specific and Dutch Government funds such as the Access to Energy Fund and Building Prospects often invest in high labor risk sectors (like energy or agriculture) and countries. To support FMO in identifying contextual risks and to contribute to its approach to decent work and job quality, FMO commissioned a study on this topic.

The study identified the most salient risks to decent work in the agriculture and energy sector. It also highlighted countries and sectors where the risk of child labor is high, or where enforcement of labor law is weak. The study recognized that some aspects associated with job quality can fall outside of the scope of Performance Standard 2 (Labor and Working Conditions). It also identified opportunities for FMO to contribute to job quality such as supporting customers to digitize wage payment and to modernize employment and human resource practices.

An important takeaway was the presence of clear business benefits to FMO customers by promoting job quality, including increased productivity, business growth and resilience by improving access to international capital, and enhanced compliance and risk management.

FMO is committed to using the insights of this study, together with the recommendations of its earlier SDG 8 corporate evaluation, to increase the focus of decent work and job quality towards 2030.

Climate Investor One

FMO commissioned a study to assess the current functioning and progress of Climate Investor One (CIO) towards its investment and development impact objectives. Given CIO’s early stage of implementation, this evaluation focused on assumptions underpinning the facility’s operations and early indications of impact. 

CIO is a blended finance facility of US$930 million that targets the entire lifecycle of renewable energy projects worldwide. Its first close was in 2015 and will run for 20 years. Climate Fund Managers (CFM) is responsible for managing CIO’s operations and investment activities. As co-founder, FMO provided an equity investment of US$50 million in CIO and also has a stake in CFM. The Dutch Ministry of Foreign Affairs invested approximately US$55 million in CIO.

The evaluation found that CIO is relevant, additional, and largely effective in supporting renewable energy projects to complete construction and achieve operations, especially by addressing (non-)financial barriers. CIO’s additionality follows from the provision of development and (initial) construction finance as this feature is still uncommon in the renewable energy market. In addition, CIO provides additional non-financial support to developers in the development phase by addressing combinations of supply chain, grid connection, public acceptance, policy environment and/or regulatory issues through technical assistance. The study recognizes the complexity of CIO’s governance structure that involves public and private investors and concluded it is functioning, but requires proactive management from CFM.

The evaluation also found that CIO operates differently than assumed in the 2019 strategy. Rather than investing in single projects, CFM has shifted towards investing in ‘platforms’ that include, but are not restricted to, pipelines of commercial and industrial (C&I) solar installations.

The evaluation generated several recommendations. CFM should continue to apply lessons learned within the limitations of CIO’s agreed structure and expand its own operational capacities concerning ESG and monitoring. FMO was recommended to coordinate all its ongoing roles in CIO and to assess how these roles can be optimized for future funds.

Commercial Investment in Forests and Sustainable Land Use

Forest protection and restoration is one of the key strategies in the fight against climate change, which is why more companies and funds are bringing innovative solutions to this sector. While their early-stage development is supported by public and philanthropic funding, they are struggling to unlock commercial funding to scale. Mobilising Finance for Forests (MFF) is a blended finance program funded by the UK Government to mobilize private sector capital to the sustainable forestry and land use sector. FMO acts as a program manager, directly financing companies and projects active in the sector, and indirectly financing funds.

FMO commissioned a study to understand barriers commercial investors see when it comes to investing in this sector, and what funds and companies can do to overcome them. The main finding was that an impact narrative is not enough to create impact. Instead, businesses need to be financially sustainable. This means companies and funds need to have strong business models that specify the road to long-term returns and a plausible exit strategy. In other words, the key barriers to commercial interest are financial. More specifically, this includes a mismatch in tenor preferences between investors and forestry companies or funds, and low risk-adjusted returns and liquidity challenges. Other barriers relate to management and staff expertise, including a lack of a proven track record and a competency gap, both in terms of financial expertise and technical knowledge.

These and other recommendations can go quite some way towards diminishing any skepticism that may deter investors.