EUROPEAN COMMISSION Brussels, 26.7.2021 COM(2021) 415 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS

on the management of the Guarantee Fund





of the European Fund for Sustainable Development











Contents 1. Introduction 2. Operational context 3. Management of the EFSD Guarantee Fund in 2020 3.1. Financial management 3.2. Market developments 3.3. Composition and key characteristics of the portfolio 3.4. Performance 4. Financial accounts 4.1 Financial statements of the EFSD Guarantee Fund as of 31 December 2020 4.2. Provisioning 5. Assessment of the adequacy of the target amount and the level of EFSD Guarantee Fund



1. Introduction The legal basis for this report is Regulation (EU) 2017/1601 (‘EFSD Regulation’). Article 16.3 of the EFSD Regulation, which states that the Commission shall provide to the European Parliament, the Council and the Court of Auditors a report on the management of the European Fund for Sustainable Development (‘EFSD’) Guarantee Fund in the previous calendar year, including an assessment of the adequacy of the provisioning and the level of the EFSD Guarantee Fund and of the need for its replenishment. 2. Operational context The EFSD covers the financing of operations in Africa and EU Neighbourhood, including both blending operations and the EFSD guarantee.

The EFSD guarantee is a key innovative element used to reduce the risks for investment in sustainable development in partner countries, thus helping mobilise investments, foster sustainable and inclusive economic and social development, maximise additionality, as well as to crowd-in private sector funds. The guarantee is intended to serve as a risk mitigation mechanism to leverage private sector financing whilst avoiding market distortions. The EFSD guarantee has been established for an overall amount of EUR 1.5 billion to be covered by the general budget of the Union. Additional contributions to support the EFSD Guarantee Fund include USD 50 million from the Bill and Melinda Gates Foundation, EUR 9.6 million from Denmark, EUR 300 000 from the Czech Republic, and EUR 100 000 from Estonia. Article 14 of the EFSD Regulation sets up the EFSD Guarantee Fund, which constitutes a liquidity cushion from which the eligible counterparts shall be paid in the event of a call on the EFSD Guarantee. The Union has made available EUR 750 million to cover its financial liabilities, which corresponds to 50% of the EU guarantee obligations. The EFSD Guarantee Fund has been effectively established in 2018. An amount of EUR 799 million has been paid to the Fund as of 31 December 2020. Information on the results achieved by the EFSD Guarantee Fund in 2019 were provided by the Commission to the European Parliament, the Council and the Court of Auditors in the Report on the management of the EFSD Guarantee Fund. 3. Management of the EFSD Guarantee Fund in 2020 3.1. Financial management The investment portfolio of the EFSD Guarantee Fund is invested in accordance with the management principles laid down in Commission Decision C (2017) 7693 of 22 November 2017, applying also to the asset management guidelines of the EFSD Guarantee Fund. These guidelines foresee that the assets in the investment portfolio shall provide sufficient liquidity in relation to the potential guarantee calls, while still aiming at optimising the return and risk level that is compatible with maintaining a high degree of security and stability. Investment and risk management strategies were adopted reflecting the investment objectives and outlook of market conditions. The investment approach aimed at enhanced diversification across various fixed income asset classes. 3.2. Market developments Market developments in the year 2020 were dominated by the spread of the COVID-19 virus, its devastating impact on public health and the global economy, and the quick and strong policy response by governments and central banks. Fixed income markets started the year with an optimistic tone, courtesy of progress in the US-China trade relationship and an overall positive sentiment regarding the economy. The 10‑year German bond (Bund) yield reached a high of -0.16% mid-January, which would prove to be the peak level for the whole year. Later that year, more than half the world’s population was effectively put in total confinement as the threat of the virus became clear creating a global shock to both supply and demand, particularly for face-to-face services. The financial markets worldwide experienced a sudden shock, combined with a huge spike in risk aversion and volatility. The ensuing ‘dash for cash’ led many investors to the fire sale of assets, causing dislocations and threatening the stability of financial markets. Equity markets plummeted and investors turned to safe assets, such as the Bund, whose yield quickly dropped to its year low of -0.86% by mid-March, and US Treasuries whose yields dropped even more, fuelled by two emergency rate cuts of the US Federal Reserve, totalling 150bps, at the beginning of March. Safe-haven yields then reversed and in tandem with the rest of the fixed income universe moved higher in the midst of market confusion and limited liquidity. The Bund moved back towards -0.20% ten days after reaching its year low. Spreads of other European government bonds to the Bund widened substantially, as did spreads of all other fixed income asset classes. To restore confidence, governments implemented rescue packages and central banks provided monetary accommodation (e.g. policy rate cuts and/or asset purchases) at an unprecedented scale, helping markets to calm and overall asset valuations to rebound. Following a volatile March, spreads stabilised from April onwards, moving on a downward trajectory. The announcement of unprecedented fiscal packages worldwide and in Europe, notably the EUR 750 billion Next Generation EU, nudged the overall yield levels higher in June, but central banks proved their resolve and contained the move to ensure favourable financing conditions amidst lingering downside risks. For the rest of the year, euro-area yields and spreads were overall gradually decreasing, while investor confidence kept improving on the back of advances on the front of vaccination and the prospect of further stimulus following the US elections in November. The Bund finished the year at -0.57%. Overall, the evolution of the fixed income markets, although characterised by a very high volatility, provided attractive investment opportunities, which in turn contributed to the positive return of the EFSD Guarantee Fund at year-end. 3.3. Composition and key characteristics of the portfolio An investment strategy guides the management of the assets of the EFSD Guarantee Fund’s investment portfolio in order to achieve the investment objectives. This investment strategy is expressed in the form of a benchmark, which sets the indicative target allocations to different categories of eligible financial assets in the portfolio. As of December 2020, the investment portfolio was made predominantly of securities issued by Sovereigns, Sub-sovereigns, supranationals and agencies (SSA) and foreign governments (46% of market value against 52% for the benchmark), unsecured bonds issued by corporates and financial institutions (14% of market value against 18% for the benchmark) and covered bonds (14% of market value against 0% for the benchmark). The remainder was mainly allocated to Money Market Funds.

At the end of 2020, the proportion of bonds complying with environmental, social and governance criteria was 12%. The portfolio duration at the end of 2020 was 2.41 years, and credit ratings of EFSD securities are split as follows: The bulk of the portfolio is invested in liquid securities and money market instruments and an adequate part (32% of the total portfolio value) matures in less than 12 months. The profile of the portfolio, in terms of duration, credit risk and liquidity, has been calibrated in line with the forecasted cash-flows arising from the EFSD operations under the EU Guarantee (e.g. projected calls, revenues). 3.4. Performance The annual performance is calculated on a time-weighted basis in order not to be affected by the size of the portfolio. In a market environment characterised by health-related volatility and historically low yields, the Fund delivered an annual absolute performance of 0.734% (time-weighted performance, before any costs and fees) in 2020. This return is in line with the annual performance of the EFSD benchmark (0.507%). However, the 2020 performance of both the benchmark and the portfolio were largely driven by positive curve returns. Considering the historically low levels reached by the EU yields, the portfolio could be negatively impacted in the coming years by opposite curve movements (i.e. rising yields). 4. Financial accounts Financial information concerning EFSD Guarantee Fund is presented below. There were no calls on the EFSD Guarantee in 2020. 4.1 Financial statements of the EFSD Guarantee Fund as of 31 December 2020 The total assets of the EFSD Guarantee Fund stood at EUR 804.12 million on 31 December 2020. The assets comprised the investment securities portfolio classified as available-for sale (EUR 692.00 million) and cash (EUR 112.12 million). In terms of the 2020 statement of financial performance, the EFSD Guarantee Fund ended the year with an economic result of EUR -0.62 million. The main reason for this was the negative interest charges on cash holdings and securities and fees (EUR -1.04 million) which could only be partially compensated by realised gains from security sales and security lending income (EUR 0.42 million). Unrealised capital gains / losses on positions still in the EFSD Guarantee Fund at the end of 2020 were only reflected in the valuation of the positions, but not in the economic result. Please refer to the point 3.4. for the performance of the EFSD Guarantee Fund including unrealised capital gains / losses. Statement of financial performance for the year ended 31 December 2020 (amounts expressed in EUR, in brackets – expenses/losses, no brackets – revenue/gains) 2020 2019 EUR EUR Revenue from operating activities - - Expenses from operating activities - - Other expenses from operating activities (15 000) (15 000) Audit fees (15 000) (15 000) RESULT FROM OPERATING ACTIVITIES (15 000) (15 000) Financial revenue 415 918 188 403 Interest revenue on: 152 600 (54 689) Cash and cash equivalents - - Available for sale assets 152 600 (54 689) Other interest revenue - - Realised gains on sale of AFS assets 250 985 240 839 Securities lending income 12 333 2 253 Financial expenses (1 024 364) (448 536) Interest expenses on cash and cash equivalents (197 065) (404 272) Realised losses on sale of AFS assets (727 658) (15) Custody fees and other financial expenses (99 641) (44 249) FINANCIAL RESULT (608 446) (260 133) ECONOMIC RESULT OF THE YEAR (623 446) (275 133)