FMO, the Dutch entrepreneurial development bank, felt the effects of the war in Ukraine and the lingering impact of the COVID-19 pandemic on its investments in the first half of 2022.
Both crises have affected the financial institutions through which FMO channels some of its funds under its “Reducing Inequalities, or RI” label, which focuses on investing in low-income countries and in inclusive businesses. As a result, the bank is off track in reaching its target of just over $1 billion in new RI investments this year. So far the bank has invested €198 million — about $198.6 million — in this channel out of a total volume of €597 million in new investments.
“There is far too little engagement by FMO with the people that are suffering the inequality and with the communities that are feeling the impact.”
— Joseph Wilde-Ramsing, senior researcher, Centre for Research on Multinational CorporationsThere has also been a €160 million impact on the bank’s private equity and loan portfolios in Ukraine, according to an emailed response from Jaap Reinking, FMO’s director of private equity.
The development finance institution, a public-private partnership with 51% of its shares held by the Dutch government, released its update this month on its performance halfway through 2022. Active since 1970, the bank currently has a committed portfolio of €12.9 billion and netted €102 million in profit in the first half of the year.
“The Netherlands is a small country geographically, but it punches above its weight in terms of driving development internationally,” Joseph Wilde-Ramsing, a senior researcher at the Centre for Research on Multinational Corporations, or SOMO, told Devex. FMO is a key player in that effort and one of the main conduits for channeling Dutch overseas development assistance.
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The bank committed to a new strategy in 2017 that broadly supports the Sustainable Development Goals, but specifically focuses on three: Decent work and economic growth (SDG 8), reduced inequalities (SDG 10), and climate action (SDG 13). Within that framework, the bank aims for one-third of its overall portfolio to contribute to reduced inequalities and climate action. At least 37% of new investments are supposed to focus on reducing inequalities and 28% on climate action.
There are some concerns about the projects FMO has grouped under its Reducing Inequalities label, though.
“There is far too little engagement by FMO with the people that are suffering the inequality and with the communities that are feeling the impact and the people who ostensibly they are trying to improve their lives,” Wilde-Ramsing said.
Instead, he said the bank has primarily used financial intermediaries, or FIs, to back social and environmental improvements, which can create problems because those intermediaries are profit-focused and do not share FMO’s commitment to reducing inequality.
“While some benefits may flow locally, local communities are also left with the environmental and human rights impacts,” Wilde-Ramsing said. “They end up, in some cases, being worse off.”
An FMO spokesperson said the bank has strict guidelines in place that govern its funding through FIs, which is primarily targeted at supporting financial inclusion for businesses owned by women, young people, migrants, refugees, and people living in rural areas. Before working with an FI, the bank goes through a strict vetting process to make sure any partner meets environmental and social risk standards, among other steps, an FMO spokesperson said.
“We feel we support the FIs that have the right focus and use our funding in line with our mission,” the spokesperson wrote.
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The use of financial institutions has created new challenges in the wake of the war in Ukraine and COVID-19, Marnix Monsfort, FMO’s director of financial institutions, told Devex in an email. With many institutions oversaturated with injections of capital intended to spur lending in response to the pandemic, even as they also exercise more caution in the wake of the war in Ukraine, there has been less demand for FMO’s funding. The result was that FMO made fewer investments targeting Reducing Inequalities than anticipated.
FMO has three areas of focus in its RI work: agricultural investments focused on smallholder farmers, energy investments largely through off-grid solutions, and a department focused on financial institutions investments.
As it looks to get its RI investments back on track, Monsfort said the bank plans to support financial institutions that are willing to start or expand their lending to small- and medium-sized enterprises with customers that serve women, youth, migrants and rural entrepreneurs. They are hoping to lend to groups that might otherwise have been perceived as too risky by using a portfolio guarantee and the liquidity that already exists within the financial institution.
“What we’re seeing is there’s no shortage of need for funding for smaller grants and smaller projects,” Wilde-Ramsing said. But he suggested FMO should send representatives to the communities to learn what projects they would like to see supported, rather than depending on intermediaries to identify the investments.
At the same time, FMO is moving to invest in efforts to alleviate the food crisis, with a focus on improving upstream food production and assuming risk in countries that require basic commodities, Pieternel Boogaard, director of FMO’s agribusiness, food and water department, told Devex in an email. That includes a $20 million investment to fund imports of wheat, cane sugar and dry milk in Yemen.
Within Ukraine, itself, the bank is trying to support its existing clients where possible, while also waiting to see how the situation develops.
“The total anticipated loss or recovery on our Ukraine portfolio is mainly depending on how the war develops,” Reinking said.