Annex 10 | Progress Update

as per December 31, 2023

1. DFCD Fund & Consortium Developments 

1.1 Introduction

The outlook for achieving a 1.5-degree world by the end of the century is currently uncertain. It seems that the international community is not acting swiftly enough to address the global climate crisis. Consequently, we can anticipate a growing requirement for investments that focus on adaptation, aimed at safeguard communities, ecosystems, and economies from the growing unpredictability of environmental shocks and stressors that may arise due to delayed action. The DFCD Consortium is a frontrunner in developing adaptation-linked investment projects that benefit vulnerable groups and ecosystems. Collectively, the partners have developed a one-of-a-kind pipeline of bankable climate projects and have found capital to scale over. 

During 2023, we have sought and will continue to actively seek third party investors to facilitate origination projects. For example, Invest International announced the investment of EUR 1 million in Orlar, an SNV originated project. Furthermore, the Land Use Facility has signed five projects, the Water Facility has signed three projects, and the Origination Facility has signed 14 grant/TA projects. All of these transactions are with a contribution (skin in the game) from a private partner. 

1.2 Consortium challenges

As a Consortium, we recognize the following challenges:  

• Targets: Reaching the Least Developed Countries (LDC) target is especially important but very difficult due to the high risk and relatively low-ticket sizes. Once the target is met, a non-LDC deal can wipe out the reached target right away.  

• Trade-off between bankability and additionality: Ideally, DFCD makes the highest impact while reaching its ‘revolvability’ target. Experience has shown that this actually is a trade-off. 

2. DFCD Origination Facility Developments 

2.1 State of affairs as per December 31, 2023

Results

Replenishment 
A pivotal development for the Origination Facility has been the injection of EUR 40 million, funding provided by the Dutch Ministry of Foreign Affairs, allowing the OF to increase the quality and quantity of climate-focused projects it originates. The additional funding is a recognition of a successful first phase and comes with the responsibility of delivering on more ambitious targets. In the proposal submitted this year we outlined our commitment to delivering more impact with an expanded impact focus on Climate Adaptation, Biodiversity, Food and Nutrition Security, and Gender Equality and Social Inclusion.

The following Tables 1 and 2 show an overview of OF projects, signed by WWF and SNV.

Table 1: Contracted OF projects as per end December 2023 by WWF

Table 2: Contracted OF projects as per end December 2022 by SNV

Graduation 

Progress on Impact Reporting

In 2023, the OF continued to meet and/or exceed targets.  

Table 3: Accumulated Technical Assistance and Grant investment in LDCs and MoFA priority countries and  Project Rio Marker Adaptation focus – (2019 - 2023)

Events and Communications

Pipeline and project graduation  

Events 
We engaged actively in a variety of events throughout the year to expand our network and engage relevant stakeholders. Some highlights included:

• Signing Ceremony (new window) of Collaboration in Cambodia: Programme Manager Aart Mulder, and Dutch Ambassador, H.E. Mr. Remco Van Wijngaarden, witnessed the signing of the MOU between Kofi and SNV in Cambodia on 21 February. The OF investment was part of collaboration that aims to develop climate-friendly coffee value chains, which help against deforestation in the Mekong Delta.  

• The African Regional Exchange: This brought together farmers, bankers, governments, and development partners to discuss ways to provide finance to smallholder farmers. Ian Isherwood (WWF-Kenya), and Tigere Muzenda (SNV) participated in the "Innovative and Value Chain Finance" discussion, showcasing the DFCD to over 200 participants from around the world.

• National Conference on Enhancing Bankability and Blended Financing for WASH in Kenya: Organized by Wilder McCoy (CFM) the event provided a platform for investors, Ministries, NGOs and SMEs to interface with one another. Jonty Rawlins (WWF) and David Wanyoike (SNV) spoke on a high-level panel on the Challenges of Investing in WASH Initiatives in Kenya.

• ESG Investor Conference 2023 - The Future of Food and Beverage Event in Asia:  Alex Downs (DFCD Regional Business Investment Officer for Asia, SNV) was the keynote speaker at the first ESG Investor Conference in Vietnam, which was held on May 31st and June 1st in Ho Chi Minh City. The DFCD also participated in a deal flow matchmaking session, to connect with local businesses that are providing climate change solutions, and who may need investment support.

• High-Level Event for Nature and People (UNGA 78): The OF arranged for the announcement of its additional €40M in funding to be shared by WWF Director General Dr Kirsten Schuijt at the High-Level Event for Nature and People: From Ambition to Action, which sidelined the 78th session of the UN General Assembly in New York, with Simon O’Connell, CEO of SNV, also in attendance. 

• The DFCD: Looking Back and Moving Forward: On the 9th of November the DFCD OF had an event to celebrate the successes of the DFCD so far and to consider what the future will hold for the fund. Steven Collet, deputy Director General, International Cooperation at the Dutch Ministry of Foreign Affairs was the keynote speaker, followed by representatives from SNV, WWF, FMO, and WaterEquity, as well as the Ambassador of Bangladesh for the Netherlands. 

Communications

A more cohesive cross-Consortium communications output has been achieved through greater collaboration among our Communications Team.

The new DFCD Website (new window) was launched over the summer, with a more up to date look and feel that better reflects the future-focused nature of the programme. Timely disclosures of investments have been hosted here throughout the year.

LinkedIn (new window) remains an important channel for building our network, and regular posts about new contracts, updates and events have seen the follower count increase by 2,500 since last year’s report. At the time of writing the number of followers stands at 7,700.

There has been a need for more video material to improve storytelling around impact on the ground and to better engage potential projects and stakeholders. Therefore, the following project videos have been created: 

• Chanzi (new window) - Reducing food waste through insect protein in Tanzania and Kenya (WWF) 

• Cinch Markets (new window) – Aggregating smallholder farmland in Kenya (WWF) 

• Minh Phu (new window) - Restoring the Mekong Delta with Rice-Shrimp Aquaculture (WWF) 

• Solar Water Solutions (new window) - Providing clean drinking water to rural homes in Kenya (SNV) 

• Vinaseed (new window) – Pioneering climate resilient rice seeds in Vietnam (SNV) 

• Camimex (new window) – Scaling climate resilient mangrove farming in Vietnam (SNV) 

• Forest Carbon (new window) – Promoting forestry carbon credit in Indonesia (SNV) 

• ACI  (new window) Agrolink – Empowering vulnerable communities through shrimp farming in Bangladesh (SNV) 

Origination Facility Knowledge Exchange

On-site Meetings  

The global WWF team holds bi-annual multi-day, face-to-face meetings to review progress, discuss any relevant issues or opportunities for improvement, strategise for the continuation of the OF, and to enhance collaboration and communication through team-building activities.  

The focus of the most recent meetings has been the graduation of projects in the current pipeline and the preparation of the OF proposal to the Ministry of Foreign Affairs for continuation of the DFCD. A face-to-face team meeting in June 2023 also featured a Consortium-wide session on the new criteria (GESI, FNS and Biodiversity) and their implications for the project origination process.  

The global teams of SNV and WWF joined face-to-face team meetings in the Netherlands in November 2023 to review results of the first phase and to prepare for the start of the second phase. This also includes reaching out to potential partners in the Netherlands, such as Invest International, that could facilitate the origination of projects with a link to the Dutch private sector. 

Learning sessions on the Landscape Approach  

  
The landscape approach (LA) was the subject of two workshops in the past year:

• An OF workshop, between SNV and WWF, was held at the WWF office in March to review the successes and challenges of the LA in the first phase of DFCD and develop an initial plan for it in the second phase. The plan addresses issues such as the creation and updating of the landscape narratives and the creation of a clear document explaining how DFCD supports the landscape approach.  

• A Consortium workshop was held at the SNV office in May to share the overview of the landscape work done in Phase 1 and the learnings from the Mekong Delta (Vietnam) and SOKNOT (Kenya/Tanzania) landscapes. The Consortium members discussed how to enhance the collaboration between the OF and the Investment Facilities (Land Use and Water Facility) for landscape level impact, and how to better integrate the Investment Facilities’ water and land perspectives into the landscape narratives. 

Capacity building workshop Zambia 

In October of 2023 the WWF ESSF team travelled to Zambia to host a DFCD ESSF-Impact workshop for African WWF offices. During this workshop focal points and ESSF leads were onboarded to the DFCD processes, new impact themes and approaches to meeting impact objectives were discussed and key activities to prepare local offices for the next phase of DFCD were established. 

Field visit Zambia, Kenya, Madagascar, South-Africa 

In November 2023 representatives from FMO, WWF-NL and SNV visited banks, companies and funds in the respective countries. During these meeting the possibilities of working together with the OF and the IF were explored. Several of these leads turned out to be promising and they will be pursued in 2024 going forward. Focus of the talks was the agricultural sector and the introduction of more sustainable farming practices. 

2.2 Challenges & (potential) environmental, social and governance incidents 

2.2.1 Project Development Challenges 

Least developed countries 

While the OF pipeline has exceeded the minimum target for funds allocated to activities in LDCs (see table above) and several of the LDC projects will be graduated to external investors, origination therein can still pose challenges. 

Underdeveloped business ecosystems, weak legal and regulatory frameworks, and high political and security risks result in a limited amount of companies meeting the DFCD Investment Facilities’ balance sheets and track record criteria. This is compounded by the limited exposure large private off-takers and investors have within LDCs. 

Global Instability 

Geopolitical unrest and asymmetric shocks around the world have, at various stages, affected DFCD target countries. Occurrences such as swings in commodity prices and currency fluctuations have negatively impacted the viability of some projects that initially looked promising. 

2.2.2 Environmental and Social Challenges

Capacity
Insufficient capacity in terms of both staffing and knowledge transfer over lengthy periods of project development can disrupt the Environmental and Social Safeguards Framework (ESSF) process and hinder the delivery of milestones in a timely manner. WWF and SNV have therefore decided to increase the size of the ESSF capacity both in the Netherlands as well as in the regions for the next phase of DFCD. 

Local Offices
The crucial role of local offices in project origination, related to the ESSF and Due Diligence is abundantly clear, but consistent, in-depth knowledge of DFCD criteria and processes is, at times, compromised by remote communication and local overload. Increased measures are being taken to avoid this, including WWF hosting multi-day capacity-building and knowledge-sharing workshops, with the first having been organized in Zambia in October 2023 for the Africa offices. 

‘Living' Lanscape Narratives 
Landscape narratives are a tool we develop to give insight into the local context of our projects and the multiple stakeholders therein. The longer we are active in a landscape, the more we learn about its context, but also the more circumstances can change. It has become clear that more regular updating of the narratives, with input from the whole Consortium, will increase the effectiveness of this tool. 

Accommodating smaller ticket sizes  
Despite their potential, smaller ticket size investments have proven difficult due to their lack of scalability and sometimes limited economic viability. The DFCD intends to overcome this by working with financial aggregators. SNV's projects NMB and Muktinath, and WWF's Financoop, are ongoing OF projects which will be instrumental in setting up a solid aggregator approach for the next phase of DFCD.   

2.2.3 Incidents

During the period of reporting two SNV supported origination projects received observations for alleged fraudulent actions. Both cases were reported to FMO, and adequate action was taken in compliance with the institutional policies. The first case has been concluded with no evidence of any misconduct. The project was resumed and successfully graduated during the third quarter of 2023. The second case, after an extensive investigation that concluded in November, did not find evidence to substantiate that the company faulted SNV’s code of conduct. Results were shared and approved by FMO. 

With respect to one WWF-NL project, the counterparty has not fully met the reporting requirements in respect of a grant. WWF-NL has informed FMO hereof and WWF-NL is considering which measurements can be taken to arrange the counterparty to comply with all reporting and delivery requirements. 

3. DFCD Water Facility Developments 

3.1 State of affairs as per December 31, 2023

3.1.1 Fundraising Update 

Looking backwards, 2023 was a year marked by economic and political uncertainties which have understandably led to increased investor caution. Even within this context, the Construction Equity Fund (CEF2) witnessed a Tier 2 commitment of USD 20m from a Family Office during Q4 2023 which brings CI2 to a total size of USD 875mn. The anchor investment by the Water Facility of EUR 75 million, has proven to be very successful. CFM’s engagement with the broader landscape of institutional investors, development finance institutions, and family offices continues it seeks to expand the Tier 2 family of commercial investors under CEF2. 

3.1.2 Pipeline and Transaction Development   

With two Frontier project, and a further three projects now approved by the CEF2 Investment Committee, CI2 CEF is ramping up its mission to deliver Water, Sanitation, and Oceans projects in emerging markets as we reach the end of Q4 2023. In section 5 and 6 of the CEF2 Annual report for FY2023, you can find the most updates for these projects, including the recently approved “OFC” project, which through a debt-for-climate conversion will protect one of the planet’s most important ecosystems: the Galapagos Islands. 

The OFC Galapagos conversion, which is the largest in history, exchanged USD 1.628 billion in Ecuadorian government bonds for a USD 656 million impact loan. CFM, through OFC, was one of the key advisors in the transaction having developed the concept to fruition. For a complete update on the project’s current status, please refer to section 6.2 of the CEF annual report for FY2023.   

Alongside this, 18 projects have received approval from the CI2 DF IC, building a pipeline of projects ready to progress to CEF2 and enter construction. Please refer to section 6 of the CEF2 annual report, or to the separate Development Fund Two report, for a comprehensive update on the status and ongoing development activities of these projects. An overview of the latest projects is shown below: 

table CFM

3.2 Challenges & (potential) environmental, social and governance incidents 

This report should be read in the context of the anomalous events of 2023 which have included the Russia/Ukraine conflict, the resultant energy crisis, the post-Covid and conflict-fueled global inflation cycle, and the strengthening US dollar. All forward-looking statements should accordingly be treated with caution and considered in light of the information available at the time of writing. 

3.2.1 Project Development Challenges

The infographic below demonstrates the current portfolio mix or CI2 projects and their stage of life. For updates relating to the specific challenges during the development or implementation of reach project, please refer to the CEF2 Q2 2023 reports, section 6 “Key Project Events”. 

3.2.2 Fundraising Challenges 

During 2023 CFM has maintained its focus on the implementation of the Climate Investor Two (CI2) strategy, which is to develop, build, refinance and exit infrastructure projects which directly contribute to the fight against climate change. In addition, CFM has continued to strengthen its people, systems and controls to ensure that it remains equipped to fulfill the 20-year mandate granted it by the Investors in the Climate Investor Two. 

3.2.3 Environmental and Social Challenges  

The potential environmental and social risks of new investment opportunities are subject to rigorous analysis through the due diligence screening process.  

Based on the findings of this analysis, the proposed investment is assigned an environmental and social risk categorisation. The assigned risk category informs investment decision-making and the required activities to be undertaken during development. Subsequently, the risk categorization may be revised on the basis of additional information gathered during studies conducted in the development phase. The risk categories are presented in the table below (4). For further information about the E&S risk categories assigned to each project please refer to the section 5 of the Q2 2022 CEF2 reports: 

4. DFCD Land Use Facility Developments 

4.1 State of affairs as per December 31, 2023

As of December 31, 2023, the Facility has committed the total amount of EUR 55 million, which was provided to the Facility in 2019. Also included are highly impactful projects brought forward by FMO’s investment staff to SNV or WWF, for de-risking before intended investment by FMO. 

The primary challenge for the LUF is to invest in projects, initiated, structured and developed by the Origination Facility. These projects need to have an acceptable ticket size and fit the risk appetite of FMO’s investment staff and credit department, in line with a 75% revolvability as per the end of 2037 target. There is a kind of ‘natural friction’ between the consortium partners on the lack of appetite from the LUF, e.g., FMO, to invest in certain perceived high risk and/ or small ticket size projects, and the perception of bankability and scalability by the Origination Facility staff.     

On a more positive note, it is obvious for us that cross-organizational collaboration is getting stronger every year, based on the learnings and experiences that have been built over the past four years. The organizational structures are becoming more formalized and due to the strong involvement of our Business Development Officer, the LUF is able to keep regular contact with the regional leads of the consortium partners, resulting in increased collaboration between FMO and the Origination Facility, also for transactions originated by FMO. When it comes to deals originated by the OF and in which FMO in the end cannot invest in, we try to involve a third-party investor on a timely basis to ensure these projects get financing and are thus considered as successful origination projects. This year we increased our list of preferred third-party investors to five, being the Hivos Triodos Fund, OikoCredit, Invest International, AgriFI and BIO (the Development Finance Institution of Belgium). This number is expected to increase to seven in the coming year. 

We are very passionate and enthusiastic to steer this facility, which will be further strengthened by the European Commission commitment. A lot of challenges, internally and externally, will keep on coming our way but with the right collaboration we are certain that we shall overcome them.  

DFCD Aya

As per December 31, 2023, the Land Use Facility (also described as “LUF”) is in an advanced stage of negotiations with the European Commission on an EFSD+ guarantee agreement. In the coming crucial period, we foresee the signing of the guarantee contract before the end of March 2024. This will result in a substantial increase of activities to look forward to, funded by an FMO-A loan of up to EUR 240 million to LUF, which will have a first loss guarantee of 43.75% under EFSD+. The guarantee under EFSD+ is also known as “DFCD Aya”. 

The setup of DFCD Aya has been realized in close cooperation with the Ministry of Foreign Affairs, whereby the steering mechanisms for DFCD, will apply for the extended LUF with European Commission support, e.g. via: 

• Rio Markers 2 for Climate Adaptation or Climate Mitigation for each projects, with a target of 65% of Adaptation Projects, and an absolute minimum of 50% of Adaptation Projects (based on committed/ contracted amounts) 

• At least 25% of the committed amounts in Least Development Countries 

• At least 25% of the committed amounts in Focus Countries for the Ministry of Foreign Affairs 

Equally important is the intended clear alignment with the Policy Memorandum of the Ministry of Foreign Affairs “Doing what the Netherlands is Good at”3. To substantiate this alignment, we refer to the argumentation below, based on the relevant focus areas described in this memorandum (quoted in “italics” in a translation version): 

“With new accents in the Dutch policy for Foreign Trade and Development Cooperation:” 

“The trading instruments contribute to a larger extent towards sustainability and digitalization”. 

DFCD is a climate program, in particular on adaptation. Sustainability is key, and digitalization is foreseen to be a material part of the intended adaptation investments via LUF. 

“Economic resilience is promoted more substantially, and entrepreneurs are more clearly protected against unfair competition”. 

Ultimate beneficiaries are agricultural companies (SMEs) and smallholders. The total DFCD concept is based on increasing the financial position of these entrepreneurs to become more resilient against climate change and unfair competition. Direct market linkages are created to increase the competitive position and avoid the middlemen segment. In addition, the access to more substantial amounts will match well with bilateral ambitions towards focus countries with involvement of the Dutch private sector, and the Global Gateway ambitions of the European Commission in certain countries. The cooperation with Invest International, one of the strategic partners of DFCD, is important here.  

“With additional investments in Development Cooperation:” 

“4 million additional people will have access to better nutrition”. 

Food security has become an extra focus area for the LUF in Phase 2, with the intention to measuring the revenues from sales/ distribution of nutritious food products.  

“The Netherlands will mobilize EUR 1.8 billion in climate finance (public and private) by 2025, half of it being public climate finance for adaptation”. 

DFCD in total has been successful in mobilizing private finance, as per the end of 2022, already EUR 144 million. It is thereby well on track of reaching the high ambition of 0.5 billion private finance as per the end of 2037. With the new (partly guaranteed) loan from FMO to LUF, another EUR 240 million private finance will be mobilized on Program level, as an extra ambition. This will be financed, where possible, by issued FMO sustainability bonds, with the remaining part via other (private) funding. Providing such a facility to a Program is something FMO has never done before (and also probably not any other Development Finance Institution). The structure, enables an effective way of mobilizing money. If we would also add a minimum 50% of private finance, we would normally catalyze on an underlying project level, the total would add up to EUR 360 million.  

In the bid book for DFCD this structure was not envisaged. The assumption made during the bidding of a 75% ‘revolvability’ for LUF (EUR 41 million of the EU 55 million to be returned as per year end 2037) and 100% for the Water Facility (EUR 75 million), will become less realistic (chance < 50%). As these assumed remaining amounts as per the end of 2037 (EUR 41 million plus EUR 75 million, or EUR 116 million in total) are part of a provided subsidy, they will only be repaid (in full), after the FMO loan is settled.  

The risk of reduced revolvability, and other relevant risk items, are shown in the following table, adding specific DFCD Aya Risks towards the three key DFCD Risks in general (the latter based on experiences and feedback of evaluators, including the Water Facility part):  

The advantage of mobilizing EUR 360 million for the envisaged impact, might be considered as an acceptable compensation for the pictured (additional) risks DFCD Aya. As described in the “Doing what the Netherlands is Good at” memo, minimizing risk is part of the Dutch government’s approach, “but also accepting that taking risks is needed to obtain results, in particular in developing countries”. The structure addresses more substantial, urgently needed, money flows towards climate finance.  

Versus the original LUF amount of EUR 55 million, and Water Facility Amount of EUR 75 million, it would result in a(n) (extra) private mobilization ratio of close to 3 - EUR 360 million divided by EUR 120 million – for the increased LUF activities. This, is in addition to the high mobilization realized via the Water Facility of Climate Investor 2.  

It can be considered as a leaner, DFI variant of commercial funding initiatives like Climate Investor 1 and Climate Investor 2. It has the potential to further grow in the future, via injection of extra buffer capital from the ministry or other donors (potentially linked towards related themes like biodiversity, food security and gender). This, parallel to eventually new guarantee commitments from the European Commission, and increased funding from FMO or any other interested institution.  

At the same time it already makes use of the high demand for sustainability bonds with a good rating in the market. For issuing these bonds, the availability of underlying green assets is often a constraint. DFCD delivers these assets. The triple A rating of FMO, provides the appropriate rating.  

“The government will make an extra effort to achieve the SDGs, partly via digitalization and innovative finance”. 

The 3 key SDGs FMO steers on, SDG 8 (decent work and economic growth), SDG 10 (reduced inequalities) and SDG 13 (Climate Action), are central in the LUF approach. In addition, SDG 17, partnership for the goals, is a very relevant goal to adds. This SDG 17 is often used for intended cooperation without clear elements to steer on. The established and properly working governance of DFCD distinguishes itself from this practice via a clear governance structure with an Advisory Board, Investment Committees and Operational Committees. All consortium partners are present in these ‘governing bodies’, and clear targets are set and monitored to provide for accountability. The fact that two NGOs work together with a development bank in such an embedded structure is already unique. Continuing it via an innovative use of the EFSD+ guarantee program, would be the next step. DFCD thereby creates a European partnership, with scalable land use ambitions, founded from the Netherlands,   

“Through combining foreign trade and Development:” 

“Dutch knowledge and skills are better linked to local organizations, allowing Dutch (development) organizations and companies, together with local players, to take more substantial steps in the sustainability and digitalization transitions.” 

The LUF will increase its focus on the Dutch private sector and institutions. The cooperation with Invest International, is already paying off here. An example of this, is the company Orlar with activities in Vietnam. An innovative horticulture concept was developed by this company, based on a substantial reduction in use of water and energy, and with new digital technology. A clear role in the project was for SNV, providing TA and grants in the development stage. Thereafter Invest International injected EUR 1 million as first investment, offering several opportunities for Dutch companies, and with clear scaling up ambitions.  

“Has the Dutch business community improved access to the developing markets of the 14 combination countries.” 

LUF will be able to invest in all 14 combination countries and has already a related pipeline. The above-mentioned example of Vietnam, one of the combination countries, was sourced and realized via an active DFCD/ SNV local office in Ho Chi Minh City. Many projects are currently in the pipeline, some of them with opportunities for Dutch companies. Active participation during the recent visit of Prime Minister Rutte in Vietnam and the planned trade mission with his Majesty the King of the Netherlands will further increase synergies between DFCD and the Dutch private sector.  

Cooperation with our increasing network of EU Delegations is also expected to lead to new opportunities for Dutch companies. DFCD was established to be additional and take extra risk. For Ukraine, combination country in extreme difficult circumstances during the current war, DFCD is clearly monitoring the situation for relevant investments. It could thereby smoothen the path for potentially needed Dutch involvement in a later post-war situation. An investment already done is the Trans-Oil transaction, which involves the importing of grain from (unoccupied territory of) Ukraine to Moldova. It provides revenues for unoccupied parts of Ukraine, has a clear food security angle (grain will be transported to Africa) and key climate adaptation purposes (Rio Marker 2). 

Progress on Impact Reporting

Currently, the LUF is on track regarding the MoFA priority countries and the Rio Marker targets. The signing of the deal with NMB Bank in Nepal also made the LDC target on track. With the recent contracting of the earlier mentioned transaction in Moldova, we were slightly behind on the LDC target for LUF, which was compensated on an overall DFCD level by the consortium partners after December 31. The challenges that come with reaching the LDC target are well-known and have been addressed earlier.

4.1.1 Pipeline and Transaction Development  

4.2 Challenges and (potential) environmental, social and governance incidents 

4.2.1 Project Development Challenges 

In a complex environment with increased regulations and Know Your Client requirements, the process of transactions takes longer, especially in projects in the targeted vulnerable countries, given the perceived higher contextual risk. Sometimes, the delay may also lead to (temporary) cancellation. 

As an example, in our previous Annual Plan and Progress Update, we cited the Muktinath case, a rural (development) bank in Nepal, which passed the Clearance in Principle stage. Unfortunately, FMO could not continue the process with Muktinath, and the loan transaction is currently on hold. Due to negative economic developments in this Least Development Country - increasing interest rates and slowdown of economic growth - acceptance of a loan facility is currently not viable for the client. At the same time SNV is continuing its TA/ Origination endeavours with Muktinath Bank on a potential new product for rural agricultural clients. In 2024 there might be a good opportunity to revitalize the intended loan facility discussions again, and benefit from advanced origination activities from SNV.    

4.2.2 Environmental and Social Challenges 

Unfortunately, we have been informed of a negative media coverage in relation to an alleged serious incident in a LUF transaction, Taprobane Seafoods. On 13 August 2023, a local CSO, the Fisherman Cooperative Society, sent a letter to the Dutch Embassy in Colombo flagging a video on YouTube that shows a discharge of untreated effluents into the Vidthalthivu Nature Reserve, an alarming event to the CSO as it is an illegal practice that can cause serious damage to the environment. Besides the video, the matter was covered in a local news article on September 10, 2023. After the video was posted, Taprobane carried out an investigation, where specialists including regulatory governmental institutions were invited to assess whether there was any discharge of effluents into the nature reserve. They confirmed that this was not the case. Furthermore, there have been organised several meetings with the Ministry of Fisheries and other expertise organizations in a bid to address the situation.  

Although an investigation and assessment confirmed that there was no discharge into the nature reserve, both the video and letter are treated as a grievance to the project. Therefore, the project-level grievance mechanism protocol is triggered at FMO. An independent investigation into the grievance will be carried out and FMO will support and guide the client through the process of community and/or complainants’ engagement until resolution of the case. As a first step, FMO has requested additional Environmental and Social (E&S) risk management information and report. An E&S site visit will be scheduled for October, followed by monitoring missions.