Europe’s private-sector-focused development finance institutions support EU regulations.

Rules framework should be tailored for application outside Europe to encourage funding flows to developing economies.

EDFI statement on the EU’s Sustainable Finance framework

Related: EDFI-authored mapping report on EU sustainable finance laws and regulations

BRUSSELS, 25 June 2024 – European bi-lateral Development Finance Institutions (DFIs) today signalled to EU policymakers the need to adapt certain aspects of its sustainable finance regulations to help keep vital capital flowing for private-sector projects in low- and middle-income countries (LMIC).

Brussel-based association EDFI outlined in a statement that the EU’s sustainable finance regulations are essential to direct capital toward environmentally sustainable economic activities, but that they currently also lead to unintended obstacles  for  channelling private-sector financing to real-economy firms in LMICs. 

Speaking at an EDFI seminar on the EU sustainable finance regulations, EDFI Chair Luuk Zonneveld said: “We applaud the EU’s commitment. The rules have embedded high standards that prove vital for delivering a strong ecosystem for sustainable investment. We see a constructive role to be played by DFIs and the impact investment community alike in the evolution to reach robust, EU-equivalent standards in developing countries.

“However, if we set the bar too high for our clients in developing countries, we run the risk that  impact investing slows down to such an extent that Europe’s influence on standards evolution in developing countries will also wane, effectively reversing progress already made. Rather, we should establish standards that encourage clients to work with their investors to achieve EU-equivalent standards over time progressively.”

Adaptations needed for performance indicators such as the Green Asset Ratio

One area of concern is the Green Asset Ratio (GAR), a key performance indicator of sustainability. Because the calculation of the ratio excludes investments beyond EU borders, the indicator currently produces zero or near-zero results for DFIs. For example, FMO, the Netherlands development investment bank, invested almost €1.1 billion in green projects in 2023, financing emissions reductions of over 2 million tons of CO2 equivalent, yet its GAR is technically 0%, like its peers. If such ratings discourage investors from pursuing investments in developing countries, it slows the flow of finance to combat climate change outside the European Union.

Consequences for Climate Finance in Developing Economies  

The EDFI statement explains that impact investors like DFIs are now pioneers and mobilisers in economies within the European neighbourhood as well as in Africa, Latin America and in Asia. They harness finance and technical expertise and connect the financial resources of Europe with those development and climate opportunities in LMICs. The statement notes: “Joining up both can bring jobs and bolster climate resilience that lead to more prosperity and stability in LMICs and in Europe.”

Adapting the regulatory framework, recognising pre-existing international rules

To keep investment flowing unconstrained to developing economies, certain elements of the EU’s regulatory requirements should be adapted and broadened:

• Adapt the requirements of the regulations to make them more suitable for application outside the EU, to promote internationalisation of the Taxonomy.
• Broaden the international outlook of the regulations by recognising pre-existing international standards, such as the IFC Performance Standards.
• Enhance consideration of transition finance, which is crucial for supporting the national sustainable development pathways being drawn up by LMICs as part of the United Nations sustainable development agenda.
• Promote interoperability between the EU Taxonomy and other national green taxonomies emerging in countries like Rwanda, Kenya, and South Africa, which are better tailored to the climate change effects and challenges they face.
• Amend certain KPIs within the regulations’ applicable to DFIs to ensure that the required disclosures adequately capture sustainable activity outside of Europe.

EDFI has a deep commitment to sustainable finance, posting a 16% rise in 2023 in new financing in climate mitigation and adaptation, to €3.6 billion. Sustainable finance framework adjustments can help this progress further to secure the future of Global Gateway strategy.

“Successful strategy delivery requires continued engagement between the European Union and European impact investors and the European DFIs,” the statement concludes. “that will help build a fully workable, adaptable, proportionate, and global system of rules. Doing so will enable us to fully contribute to the mobilisation of investment for LMICs and the full array of aspirations of the strategy.”

EDFI Position Statement on EU Sustainable Finance Regulatory Framework

Related: EDFI-authored mapping report on EU sustainable finance laws and regulations

For more information, contact:

EDFI:

James Brenton, Sustainable Finance & Impact Advisor, james.brenton@edfi.edu
James Pieper, Communications Advisor, james.pieper@edfi.edu, +32 490 16 76 67

Notes to editors:

About EDFI: The Association of European Development Finance Institutions, or EDFI, was established in 1992 to support and promote the work of bilateral Development Finance Institutions (DFIs). With a combined portfolio of €53 billion, including over €15 billion of climate finance, EDFI’s 15 member institutions share a vision of a world where the private sector offers people in low- and middle-income countries opportunities for decent work and improved lives, and where private investment flows are aligned with the Sustainable Development Goals and the Paris Climate Agreement. EDFI’s mission is to promote the joint interests of its members, inform policy, and drive innovation in industry standards. Learn more at www.edfi.eu

EDFI membership: BII (United Kingdom), BIO (Belgium), Cofides (Spain), DEG (Germany), Finnfund (Finland), FMO (The Netherlands), IFU  (Denmark), Norfund (Norway), OeEB (Austria), Proparco (France), SIFEM (Switzerland), Simest and CDP Development Finance (Italy), SOFID (Portugal), and Swedfund (Sweden).

 

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