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Stringent EU rules on sustainable finance are preventing investment in emerging markets, the head of one of the EU’s largest development banks has said, warning that Chinese and Middle Eastern groups are filling the gap.
“The requirements are so strict for the moment that the chances of potential clients in emerging markets moving to other financiers, for instance from east Asia, is really serious,” said Michael Jongeneel, chief executive of FMO, the Dutch development finance institution.
European development finance institutions are urging Brussels to overhaul the rules to spark a surge in overseas investment that could also support the bloc’s foreign and climate policy aims, including green transition projects such as battery development and solar farms.
Jongeneel said the rules penalised DFIs by not recognising overseas investments as sustainable under its “green asset ratio”, an EU calculation intended to show what proportion of a bank’s assets can be considered climate-friendly. It is increasingly used by institutional investors trying to meet environmental, social and governance criteria.
That meant that banks faced reputational risks that deter private capital, Jongeneel told the Financial Times, adding: “It depends on the flexibility of the investor if they are willing to listen to us and have us explain.”
Brussels aims to mobilise €300bn in private and public funding between 2021 and 2027 for infrastructure investment in third countries through its Global Gateway scheme. Funds raised through the initiative also aim to secure supplies of critical materials for the green transition, such as lithium and copper.
But other regions are aiming to increase investment in developing nations.
Gulf countries announced more than $53bn of foreign direct investment in Africa last year, the second highest amount from the region, according to FDI Intelligence, while China invested about $80bn in more than 40 countries in 2023, the American Enterprise Institute think-tank said.
EDFI last month echoed Jongeneel’s criticism that the rules on sustainable finance, laid out by the European Commission in 2018 ahead of its landmark Green Deal, are harming development banks’ ability to advance the Global Gateway goals.
EDFI chair Luuk Zonneveld warned against “setting the bar too high”, adding: “We run the risk that impact investing slows down to such an extent that Europe’s influence on standards . . . in developing countries will also wane, effectively reversing progress already made.”
Koen Doens, the commission’s head of international partnerships, defended the rules last month but said the bloc’s executive branch was engaged in “discussions” about how to recognise investments outside the EU as part of the green asset ratio.
The commission said third-country investments were not included because businesses outside the EU were not obliged to report against the bloc’s corporate sustainability rules.
“The EU Platform on Sustainable Finance is looking at the international application of the EU taxonomy and wider sustainable finance framework,” it added.
The warning comes after asset managers raised concerns last year that rules governing fund classification were also unworkable.
The Green Deal — and the hundreds of pieces of legislation that it spawned — has faced heavy criticism from rightwing and liberal lawmakers who say that it is strangling the EU’s ability to compete.
Jongeneel said the bank was “very closely monitoring” the shift towards rightwing politics following bloc-wide elections in June. In the Netherlands, a new coalition which includes several far-right ministers has pledged to cut its development aid budget by €300mn next year and then reduce it incrementally by up to €2.4bn annually from 2027.
FMO is 51 per cent owned by the Dutch government and made €2.7bn in new investments in 2023, up 11 per cent on the year before.
Jongeneel said FMO’s lending operations would not be hit as it does not receive a direct subsidy but the change “puts development aid in a different daylight”. “We should not be naive that there is another wind blowing,” he added.
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