The Dutch development finance institution, FMO, has just closed a public consultation on its new position paper on reducing fossil fuel exposure in its investments. Recourse has submitted two inputs to the consultation – with allies Both Ends and others, and a standalone submission.
Climate is a priority for FMO. One of the three ‘headline’ Sustainable Development Goals (SDGs) FMO focuses on in its work is SGD13 on Climate Action. In practice, “this means pursuing a portfolio that delivers positive outcomes on climate mitigation and adaptation;” and includes striving “to align our portfolio with a 1.5°C pathway.” This is a laudable ambition.
It is therefore surprising and deeply disappointing to find that FMO’s new climate policy does not apply to its entire portfolio, but only to FMO’s direct investments There is no rationale given for the omission of indirect lending to FIs in the draft Position Statement.
The rationale for including indirect as well as direct investments in the Position Statement is clear, for two important reasons. First, FI lending forms an important and growing part of FMO’s portfolio. FMO’s annual financial intermediaries portfolio in debt and equity more than doubled from EUR 600 million in 2016 to EUR 1.3 billion in 2019. Current financial intermediary investments total 338 – a significant proportion of overall business, at over a third of the total number of investments (919).
Second, FI investing is higher risk than direct investing, by its hands-off nature, leaving FMO potentially exposed to projects that do not meet its environmental and social goals. Recourse has advocated around the issue of FI investing for many years, including at the International Finance Corporation (IFC). Our work with partners helped to expose how IFC inadvertently supported over 40 coal plants through its FI portfolio and led to IFC introducing far-reaching reforms: developing a new approach to greening equity and taking action to ring-fence debt investments, in order to limit fossil fuel exposure.
The exclusion from the Position Statement of over a third of FMO’s business simply does not make sense and leaves a loophole which could end up undermining commitments and achievements in FMO’s direct lending portfolio. Such an exclusion risks policy incoherence and should be addressed as a matter of urgency.