FMO fails to meet best practices on financial intermediary lending

In a new Position Statement on Financial Intermediary (FI) Lending, Dutch development bank FMO argues for limited responsibility over the outcomes of investments that are channeled through commercial banks, investment funds, and other financial intermediaries, representing by far the bigger sector of its portfolio. In doing so, FMO is undermining its development mission, including the protection of human rights and addressing the climate crisis. FMO intends to delegate these key responsibilities to its FI clients only, falling short of best practices of peer financial institutions. In a joint submission prepared by Both ENDS, Oxfam Novib, Recourse and SOMO, we argue that FMO can do much more to ensure the protection of human rights, the environment, and to measure the development impact of its indirect investments.

Financial intermediaries, what are they?

When investments are channeled through financial intermediaries such as commercial banks or investment funds, the financial value chain gets longer with implications for transparency. The opacity and lack of transparency(opens in new window) around financial intermediary investments made by development finance institutions means weak enforcement of environmental and social standards, lack of clarity regarding where development finance ends up, and what the development impacts of investments are. Most importantly, communities impacted by high-risk projects do not know who is behind investments and what protections they have, they are denied their right to information(opens in new window) and consequently their access to remedy for adverse impacts is significantly limited. Devastating impacts of this approach to financing development projects has been well-documented(opens in new window) in a number of projects(opens in new window) leaving behind serious environmental destruction and entire communities being forcibly evicted.

FMO concedes responsibility to client

It has been at least four years that our organizations have been engaging with FMO directly to become more transparent and accountable when it comes to its investments in FIs. FMO has been investing in FIs for at least a decade, and until now, it has never had a public policy under which conditions it channels these funds. Meanwhile, it invested €3.7 billion through FIs in 2021 alone, a figure that represents about 40 percent of its investment portfolio. And to date, FMO is clear in its position that the responsibility lies with its client, and its client only, even though its own FI Evaluation(opens in new window) has shown that FI clients struggle to implement required environmental and social frameworks.

Transparency and change in mindset

We are happy that FMO is consulting the public on its position statement, and we hope that it will agree that to become a leading development institute, it needs to change its mindset drastically. The bank needs to become transparent about its investments, know and report about the human rights risks, report on and rapidly phase out fossil fuel investments, require the implementation of safeguards and act on negative impacts that arise. Only by doing so, it can truly uphold its own vision(opens in new window) to have a world where more than 9 billion people live well.

Read the joint submission to the FMO on financial intermediaries(opens in new window) by Both ENDS, Oxfam Novib, Recourse and SOMO.