Reporting – FMO (Netherlands Development Finance Company) (2017)

Adoption Date:19 October 2005
Country of Headquarters:The Netherlands
Region of Headquarters:Europe
Institutional Reporting Hyperlink:https://www.fmo.nl/reports
https://www.fmo.nl/policies-and-position-statements
Current EPFI Reporting Year/Period:2017
EPFI Reporting in Compliance:Yes

Please read the important notes and disclaimer for further information on ‘EPFI Reporting’, compliance and publication on the Equator Principles Association website.

Further information on this EPFI may be obtained through the Institutional Reporting Hyperlink above.

PROJECT FINANCE ADVISORY SERVICES

Total number mandated in the reporting period: 0

PROJECT FINANCE TRANSACTIONS

Total number that reached financial close in the reporting period: 20

Totals2180
Totals2180
SectorCategory ACategory BCategory C
Mining
Infrastructure11
Oil & Gas1
Power16
Others1
RegionCategory ACategory BCategory C
Americas17
Europe, Middle East & Africa10
Asia Pacific11
Country DesignationCategory ACategory BCategory C
Designated1
Non-Designated218
Independent ReviewCategory ACategory BCategory C
Yes216
No2

1Designated Countries are those countries deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment. For the list of Designated Countries, go to: https://www.equator-principles.com/index.php/ep3/designated-countries

PROJECT NAME REPORTING FOR PROJECT FINANCE TRANSACTIONS

No.Project NameSectorHost Country Name/ Project LocationYear of Financial Close
1Vientos de Electrotecnia S.A. de C.V.PowerHonduras2017
2APM Terminals Callao S.A.InfrastructurePeru2017
3Electronic J.R.C. S.R.L.PowerDominican Republic2017
4Aswan PV Power S.A.E.PowerEgypt2017
5Kom Ombo Renewable Energy S.A.E.PowerEgypt2017
6Upper Egypt Solar Power SAEPowerEgypt2017
7Zafarana Solar Power S.A.E.PowerEgypt2017
8Red Sea Solar Power S.A.E.PowerEgypt2017
9Akuo Kita Solar S.A.PowerMali2017
10Montecristi Solar F.V., S.A.S.PowerDominican Republic2017
11Senergy 2 S.A.SPowerSenegal2017
12Vientos los Hercules S.A.PowerArgentina2017
13Pacific Solar Energy S.A. de C.V.PowerHonduras2017
14FRV Andhra Pradesh Solar Farm-I Private LimitedPowerIndia2017
15Daraw Solar Power SAEPowerEgypt2017
16Infinity Benban Park Solar Energy S.A.E.PowerEgypt2017
17Parques Eolicos del Caribe S.A.PowerDominican Republic2017
18Baynouna Solar Energy Company PSCPowerJordan2017
19Excelerate Energy Bangladesh LtdOil & GasBangladesh2017
20Coöperatieve Rabobank U.A.OthersMexico2017

PROJECT-RELATED CORPORATE LOANS

Total number that reached financial close in the reporting period: 0

IMPLEMENTATION OF THE EQUATOR PRINCIPLES

In 2006, the Netherlands Development Finance Company (FMO) adopted the Equator Principles (EP) to create a risk management framework for determining, assessing and managing environmental and social risks in projects.

FMO believes that good economic, environmental and social (E&S) management, and corporate governance, are interrelated. Therefore, we are convinced that there is a strong business case for the incorporation of E&S issues in business strategies. As a consequence, FMO recognizes the value of considering environmental and social criteria when financing and therefore decided to endorse the Equator Principles. The main objective is to express our commitment to mainstreaming sustainability considerations in financial best practice throughout the sector and effectively apply environmental and social criteria in all financing transactions that FMO concludes.

As stipulated by our Environmental & Social (E&S) policy, FMO has been using the Safeguard Policies / IFC Performance Standards (IFC PS) since the year 2000. Due to the new reporting requirements requested in the third generation of EP (EP III) to further breakdown the categorized investments by sector, region, and independent review, we have simplified our quantitative reporting to cover the exact scope of the EP III.

Additionally, FMO applies the safeguard policies and the IFC PS to all its financing, including financing under US$10 million and not only our project finance transactions but corporate finance as well. Although indirect investments are not within the scope of Equator Principles, we still work with our financial institution (FI) clients and private equity funds (PEF) in which we invest, to improve how they handle the environmental and social risk in their portfolios. Depending on the risk category, we expect the FIs and PEFs to apply certain environmental and social standards when financing or investing in their clients. Basically, we work with FIs and PEFs to establish and maintain an E&S Management System  to ensure that its investments meet (or over time become compliant with) FMO’s requirements. Through this, we identify potential value creation that can be achieved with these clients. Therefore, FMO goes further than the Equator Principles’ requirements.

FMOs ENVIRONMENTAL & SOCIAL POLICY

Minimum Requirements

FMO can work with a broad array of privately owned companies, financial institutions (FI) and private equity funds (PEF). It chooses not to select clients which are part of our Exclusion List. The Exclusion List relates to activities that are not supported by development banks such as FMO due to their unacceptable nature (i.e. child labor). See FMO’s website for the full list https://www.fmo.nl/policies-and-position-statements, under Exclusion list. Moreover, FMO also requires its FI and PEF clients to apply this Exclusion List to the clients they select in their portfolio.

ESG Integration into Investment Process

FMO considers ESG issues integrated into the organisation. Almost all departments involved in the credit process have ESG expertise or exposure to ESG issues. Investment managers are responsible for addressing ESG issue with low risk clients and work together with E&S and Corporate Governance officers on high risk clients. The same applies to the credit analysts in the credit department. Legal counsels work together with deal teams to incorporate ESG clauses in the contracts and our portfolio management departments work on monitoring ESG actions and reporting that clients have to undertake.

FMO evaluates (on a risk-based approach) all of its financing against the IFC Performance Standards regardless of asset class and amount of investment. Should ESG gaps be identified at our clients we work with them to develop an Environmental and Social Action Plan (ESAP) and/or Corporate Governance Plan to close these gaps according to the IFC PS and our Corporate Governance Policy. Within our investment directorate there are ESG officers who participate in the deal teams together with the investment officers to carry this out. On a transaction level, commercial managers remain responsible for the implementation of the Sustainability Policy in the transactions. ESG staff report directly to department specific ESG Managers. The purpose of the ESG manager layer (3 Front Office E&S Managers, 1 Front Office Corporate Governance Manager and 1 Strategy Development Impact and Sustainability Manager) is to ensure clear accountability for meeting ESG targets and enable integrated steering of performance. In 2017, FMO has reorganized its ESG staff into four teams, in addition to the existing CG team, with dedicated expert managers introduced in order to deepen expertise, improve local stakeholder management, and drive effective and consistent implementation of ESG policies and guidelines, including human rights. Ultimately, the Management and Supervisory Boards are responsible for FMO’s ESG targets. FMO currently has an organisation wide target where we aim to achieve an implementation of at least 90% of our ESG action items due in reporting year, which is tracked in an internal IT system called SusTrack. This is one of FMO’s non-financial targets, which is included in the annual report.

In 2017, as part of revised Sustainability Framework, FMO has issued position statements that further reinforce ESG issues into the organization. These position statements include Human Rights, Gender, and Land Governance. FMO also published its path to becoming a leader in this space, from compliance to value add. The path reflects FMO’s ambition to become a leading bank in financing the transition to a more inclusive and greener economy. This entails the conscious build-up of a portfolio of projects that target sectors that support people that are in need of access to basic services, e.g. finance, energy and food, and achieve an optimal use of scarce resources and a reduction of harmful emissions. These can be found at https://www.fmo.nl/policies-and-position-statements.

DIRECT INVESTMENTS

All our direct investment clients (including those in which we take equity) are required to comply with national E&S law as a minimum standard, and with the Environmental and Social Performance Standards, as developed by the International Finance Corporation (IFC), member of the World Bank Group, whichever stricter. To help our direct investment clients establish sound ESG practices, we use a practical framework. The framework comprises of four parts: (1) Risk Categorization of clients, (2) Establishing applicable requirements, (3) Environmental and Social Action Plans and (4) pricing incentives.

(1) Risk Categorization of Clients

All new and existing clients are subject to a Risk Categorization of their (potential) Environmental and Social impacts. There are four risk categories A, B+, B and C: A = high risk: Projects / clients with potential significant adverse social or environmental impacts which are diverse, irreversible or unprecedented. B+ = medium high risk: Clients with potential adverse social or environmental impacts that are generally beyond the site boundaries, largely reversible and can be addressed through relevant mitigation measures. B = medium risk: Clients with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures. C = low risk: Projects with minimal or no adverse social or environmental Impacts. The categorization of clients into the A, B+, B, or C category is largely based on an assessment against the applicable IFC Environmental and Social Performance Standards. At the same time, we cooperate closely with the European Development Finance Institutions (EDFI’s) with the purpose to harmonize our definitions and requirements.

(2) Establishing applicable requirements

FMO requires that all clients and equity investments comply with applicable environmental, social and human rights laws in their home and host countries. Applicable environmental, social and human rights laws are both applicable national and international law to which the client is subject In addition, FMO upholds a set of (inter)national standards, as specified in Chapter 4 of the FMO Sustainability Policy. With respect to the management of environmental and social impact, the primary standards that guide FMO’s relationship with clients are the IFC Environmental and Social Performance Standards and the associated World Bank Group Environmental Health and Safety Guidelines.

(3) Environmental and Social Action Plans

Based on the outcomes of the assessment carried out, an Environmental and Social Action Plan (ESAP) is to be agreed upon as necessary, with clear and practical milestones to be achieved within a certain period. The ESAP would normally allow clients a reasonable time period (ca. three-year period) , and at a minimum within the period of investment to reach full compliance with the requirements. For clients in category B and C, no in-depth assessment is required. However, on a voluntary basis we try to identify potential value creation that can be achieved with these clients. The ESAP is, in cooperation with the client, made “SMART”, i.e. Specific, Measurable, Achievable, Realistic and Time-Bound, and included in the loan documentation. Non-compliance with key milestones of the ESAP constitutes an event of default under the loan documentation. For FMO’s direct equity transactions, the ESAP shall be firmly agreed and under implementation before disbursement of FMO’s funds and the E&S principles applied by the company shall be firmly constituted in the Shareholders Agreement. Effective implementation of the ESAP adds value to the client, it mitigates E&S risks and it contributes to E&S development impact that FMO achieves through its financing.

(4) Pricing Incentives/Penalties

FMO can support the E&S business case in structuring its financial products. From a risk-return perspective, FMO can support implementation of major milestones of the ESAP by offering pricing incentives and/or requiring pricing penalties (in case of non-compliance with the Environmental and Social Action Plan) and by providing capacity development grants for technical assistance.