NMB Bank's joint venture agreement with the Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO) has cemented its position as the market leader in managing environmental and social risks and the leading player in renewable energy and agribusiness in Nepal. Michael Jongeneel, chief executive of FMO, shared with The Himalayan Times his insights on diverse issues ranging from the Dutch bank's experience in Nepal, the changing landscape of sustainable financing, among others. Excerpts:
FMO has more than 50 years of expertise in sustainable private sector investments in emerging markets. Can you explain the importance of private sector investment and how the local communities will benefit from such investment?
We provide finance to the private sector in low- and middle-income countries, supporting production, employment, export revenues, tax income for local governments, but also acting as a change agent on environmental, social and governance issues. By doing so, we enable entrepreneurs to increase inclusive and sustainable prosperity for local communities.
FMO has been investing in Nepal for quite some time. Please share your experience working in Nepal?
For FMO, working in Nepal has been very fulfilling. We have been able to play a pioneering role in development finance in Nepal. Our first loan in the country was to the Upper Bhotekoshi hydroelectric project, in 1996. More hydro-investments followed, and in 2019 FMO facilitated the signing of a joint declaration of the Nepal Bankers' Association and the Independent Power Producers' Association Nepal (IP- PAN) to promote sustainable development of hydropower in Nepal. The hydro sector is extremely important for Nepal to produce energy and generate export revenues, but at the same time these projects should be managed with high social and environmental standards. We are happy that banks and hydro companies are increasingly aware of the risks involved.
We started investing in the financial sector in 2008, with banks like Clean Energy Development Bank, which later merged into NMB. FMO also supported private equity funds like Dolma Impact Fund 1 and recently Fund 2, which provide scarce growth capital to small and medium-sized businesses. Recently, together with the BII and SDC, we launched Nepal Invests, a collaboration between DFIs and development partners in the country. The aim is to further accelerate investment in Nepal and at the same time support the private sector to raise its environmental and social standards together with local stakeholders.
FMO is strongly promoting a sustainable finance plan. But what is sustainable finance?
How is it important for a developing country like Nepal? Sustainable finance is lending and investing in areas that have positive impacts on the environment and society, taking due account of environmental, social and governance (ESG) considerations and improving in these areas. Our aim is to contribute to a world in which, by 2050, more than nine billion people live well, within planetary boundaries. One example of the importance of sustainable finance for Nepal was once well captured by a colleague who works closely with our Nepali clients. This is what she said on the potential of Nepal as a green hydro-energy producer: "40,000 megawatts is huge and could mean a world of difference to the environment in South Asia and to the economics of Nepal. But only if Nepal gets the environmental and social conditions right. They need to take care of their rivers. If they do not, they could kill the goose laying the golden eggs."
In Nepal, the NRB introduced ESRM guidelines in 2018 that the financial sector needs to implement. FMO in a direct way, and via Nepal Invests, will support NRB to implement these Environmental and Social Risk Management systems with banks. We are proud NMB is a frontrunner here. A good governance system is also the key. Setting up systems so that management, board members and shareholders each play their own role is very important. Companies with good governance perform best.
Nepal has pledged to achieve a net zero target by 2045. To achieve this target, Nepal needs huge investment from outside the country. How can FMO fund Nepal's net zero transition?
FMO can be an active lender and shareholder in existing and new projects that support net zero target by 2045. At the same time, we need to take care of a just and inclusive transition. It's important that regulations make this kind of investments attractive. To develop a transparent capital market where foreign entities dare to invest in Nepal, is a crucial part to realise this objective. That is why FMO also supports PE funds like Dolma, and why Nepal Invests supports other private equity investments in Nepal.
NMB Bank, where FMO holds the largest stake, is the frontrunner in implementing sustainable finance agendas in Nepal. How are you supporting NMB in the sustainable finance space?
FMO is the largest shareholder, with 14 per cent, in this 'Best Bank of Asia', according to the Financial Times in 2021. We are proud that all NMB front office staff have been trained to look at ESG when considering financing a project or company. Especially with new hydro projects, that come with high risks, the involvement of NMB will convince other foreign parties to co-finance as well, as ESG elements have been taken into account by NMB already.
The central bank has implemented the ESRM directives for banks and financial institutions working in Nepal. What is your say on the environment and social risk issues?
How is FMO managing this issue while investing in Nepal? How is it important while financing the infrastructure projects? FMO has not yet studied these new directives in full. We support the NRB's involvement with this important topic. If foreign entities like FMO make an investment, it is very important that the E&S risks are mitigated by solid agreements and contracts with the various stakeholders involved. If these risks are not covered well in one transaction, it could create difficulties for other projects to attract financing as well.
Technology transfer is an inherent component of foreign capital. How are you supporting your investee companies in Nepal to build expertise in emerging issues such as sustainable finance, environment, social risk management, carbon disclosure, etcetera?
We're supporting our clients and stakeholders by connecting them to specialists, to build up their expertise. This is part of our mandate. However, in Nepal, clients and authorities sometimes overlook that these are costly practices. DFIs like FMO cannot take over all capacity building on technology.
One of the major inherent risks for attracting foreign direct investment is the effective management of foreign currency exchange risk. How can a developing country like Nepal manage this risk in the best possible way?
How are you addressing this risk while making investments in Nepal and other developing economies? Managing the forex reserves as a country is indeed very important. Normally international institutions like IMF support a country with this. The more reliable the forex management in a country is, the easier it will be to attract foreign loans and investments. To keep two independent separate monetary authorities like your central bank and the Ministry of Finance is an important condition that creates confidence. If the exchange rate is unstable, it will be almost impossible to attract loans in local currency at a fixed interest rate. FMO at present is considering a loan in local currency to NMB.
As the European Union is introducing green taxonomy, our central bank has planned to introduce green taxonomy for Nepal. Can you briefly explain green taxonomy and how it is essential for promoting green financing?
The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It could play an important role in helping the EU scale up sustainable finance and implement the European green deal. The EU taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.
A central bank can link the activities of the banks in their country and stimulate these banks via capital risk weighing tools to only provide loans in sustainable economic activities. In Europe, the commercial banks via the European Banking Federation are in active communication with regulators on how to implement this. FMO is an active sponsor of this project. It is also likely the Nepali economy will be confronted with this kind of classification. Nepal being a frontrunner on this green taxonomy, again could attract funding from sources from other EU countries that are motivated in similar way.
A version of this article appears in the print on September 14, 2022 of The Himalayan Times.
