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
Date: 2020-07-31
Institutions: Directorate-General for International Cooperation and Development, European Commission
Subjects: ACP countries, Africa, European Neighbourhood and Partnership Instrument, eligibility criteria, financial control, fund (EU), investment promotion, operation of the Institutions, regional investment, sustainable development

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 31.7.2020  COM(2020) 346 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 

2. Operational context ................................................................................................................ 2 

3. Management of the EFSD Guarantee Fund in 2019 .............................................................. 3 

3.1. Financial management ..................................................................................................... 3 

3.2. Composition and key characteristics of the portfolio ...................................................... 3 

3.3. Performance .................................................................................................................... 4 

4. Financial accounts .................................................................................................................. 4 

4.1 Financial statements of the EFSD Guarantee Fund as of 31 December 2019 ................. 5 

4.2. Provisioning .................................................................................................................... 8 

5. Assessment of the adequacy of the target amount and the level of EFSD Guarantee Fund .. 8 

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1. INTRODUCTION 

The  legal  basis  for  this  report  is  the  Regulation  (EU)  2017/1601  (‘EFSD  Regulation’)1. 
Article 16.3 of the EFSD Regulation sets that the Commission shall provide to the European 
Parliament,  to  the  Council  and  to  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. By end of 2019, 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 600.1 million has been paid to the Fund as of 31 December 2019.  

Information  about  the  EFSD  implementation  was  included  in  the  recent  Report  from  the 
Commission to European Parliament and the Council2.  The report, based on the outcome of 
an independent external assessment, concludes that EFSD is highly relevant to the need for a 
new  global  development  finance  model,  as  well  as  to  the  investment  needs  of  Sub-Saharan 
Africa and the EU Neighbourhood regions.  

1 Regulation (EU) 2017/1601 of the European Parliament and of the Council of 26 September 2017 establishing 

the European Fund for Sustainable Development, the EFSD Guarantee and the EFSD Guarantee Fund 

2  COM(2020)  224,  Report  from  the  Commission  to  the  European  Parliament  and  the  Council  on  the 

implementation of the European Fund for Sustainable Development  

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3. MANAGEMENT OF THE EFSD GUARANTEE FUND IN 2019 

3.1. Financial management  

The  investment  portfolio  of  the  EFSD  Guarantee  Fund  is  invested  in  accordance  with  the 
management  principles 
in  Commission  Decision  C(2017)7693  of 
22 November 2017 approving the asset management guidelines of the EFSD Guarantee Fund. 

laid  down 

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. 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. 

On 31 December 2019, the investment portfolio was made predominantly of securities issued 
by Sovereigns, Sub-sovereigns, supranationals and agencies (SSA) and foreign governments 
(45% of market value against 52% for the benchmark), unsecured bonds issued by corporates 
and financial institutions (22% 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  2019,  the  exposure  of  the  portfolio  to  bonds  complying  with  environmental, 
social and governance criteria was more than 2 times higher than in the benchmark.  

The portfolio duration at the end of 2019 was 2.51 years, and credit ratings of EFSD securities 
are split as follows:  

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The bulk of the portfolio is invested in liquid securities and an adequate part (14% 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). 

3.3. Performance 

The annual performance is calculated on a time-weighted basis in order not to be affected by 
the size of the portfolio, which grew considerably during the year.  

In  a  very  challenging  market  environment  characterised  by  overall  negative  or  historically 
low yields coupled with significant market volatility and uncertainties, the Fund delivered an 
annual  absolute  performance  of  0.242%  (time-weighted  performance,  before  any  costs  and 
fees)  in  2019.  This  return  is  in  line  with  the  annual  performance  of  the  EFSD  benchmark 
(0.149  %)  and  was  achieved  against  a  background  of  negative  rates  in  the  euro-area 
(especially for what is perceived by the markets as "credit risk free" and liquid exposures in 
Europe).  

4. FINANCIAL ACCOUNTS 

Financial information concerning EFSD Guarantee Fund is presented below. There were no 
calls on the EFSD Guarantee in 2019. 

4.1. Financial statements of the EFSD Guarantee Fund as of 31 December 2019  

The positive market developments, with the drop of the EUR yield curve combined with the 
good performance of most of fixed income sectors, as described in point 3.3 above, kept the 
total  assets  of  the  EFSD  Guarantee  Fund  close  to  the  total  contributions  to  the  fund  of  
EUR  600.1  million  and  stood  at  EUR 599.59  million  on  31  December  2019,  despite  the 
impact  from  negative  interest.  The  assets  comprised  the  investment  securities  portfolio 
classified as available-for sale (EUR 594.71 million) and cash (EUR 4.88 million). 

In terms of the 2019 statement of financial performance, the EFSD Guarantee Fund ended the 
year with a slightly negative economic result of EUR -0.26 million3. Main reason for these are 
the  negative  interest  charges  on  cash  holdings  and  securities  (EUR  -0.45  million),  due  to  a 

3 This is in line with the money-weighted return of -0.103%, which considers the significantly growing size of 
the EFSD Guarantee Fund in 2019 due to budgetary contributions in the building-up phase. Money-weighted 
return  was  lower  in  2019  than  the  time-weighted  performance  referred  to  in  point  3.3.  The  time-weighted 
return is the official performance reported for all EC Asset Management activities, as it allows to eliminate 
the distorting effects created by inflows and outflows. 

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largely  negative  interest  rate  environment,  which  could  only  be  partially  compensated  by 
realised gains from security sales and security lending income (EUR 0.19 million).  

Balance sheet as at 31 December 2019 

(amounts expressed in EUR) 

ASSETS 

NON-CURRENT ASSETS 

31 December 2019 
EUR 
348 061 980 

31 December 2018 
EUR 

3 577 001 

Available for sale financial assets 

348 061 980 

3 577 001 

CURRENT ASSETS 

251 527 281 

271 469 460 

Available for sale financial assets 

246 643 539 

5 795 882 

Receivables (i.e. securities lending fees) 

1 595 

- 

Cash and cash equivalents 

Current accounts 
Accrued interest on cash and cash equivalents 

4 882 147 
4 885 215 
(3 068) 

265 673 578 
265 721 781 
(48 203) 

TOTAL ASSETS  

599 589 261 

275 046 461 

NET ASSETS AND LIABILITIES 

NET ASSETS 

Contribution from EU Budget 
Fair value reserve 
Retained earnings 
Economic result of the year 

31 December 2019 
EUR 
599 567 587 

31 December 2018 
EUR 
275 030 778 

600 100 000 
(188 713) 
(68 567) 

(275 133) 

275 100 000 
(655) 
- 

(68 567) 

CURRENT LIABILITIES 

21 674 

15 683 

Other payables 

21 674 

15 683 

TOTAL NET ASSETS AND LIABILITIES 

599 589 261 

275 046 461 

5 

 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statement of financial performance for the year ended 31 December 2019 

(amounts expressed in EUR) 

Revenue from operating activities 

Expenses from operating activities 
Other expenses from operating activities 
     Audit fees 

2019 
EUR 

2018 
EUR 

- 

- 

- 
(15 000) 
(15 000) 

- 
(15 000) 
(15 000) 

RESULT FROM OPERATING ACTIVITIES 

(15 000) 

(15 000) 

Financial  revenue  
Interest revenue on: 
     Cash and cash equivalents 
     Available for sale assets 
Other interest revenue 

Realised gains on sale of AFS assets 

Securities lending income 

188 403 
(54 689) 
- 
(54 689) 
- 

240 839 

2 253 

(1 088) 
(1 088) 
- 
(1 088) 
- 

- 

- 

Financial expenses  
Interest expenses on cash and cash equivalents 

(448 536) 
(404 272) 

(52 479) 
(50 958) 

Realised losses on sale of AFS assets 

(15) 

- 

Custody fees and other financial expenses 

(44 249) 

(1 521) 

FINANCIAL RESULT 

(260 133) 

(53 567) 

ECONOMIC RESULT OF THE YEAR 

(275 133) 

(68 567) 

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4.2. Provisioning 

The  EFSD  Guarantee  Fund  is  provisioned  from  the  budget  of  the  Union  and  the  European 
Development Fund (EDF). For the current MFF (2014-2020), the detailed sources of funding 
of the EFSD Guarantee Fund include: EUR 400 000 000 from the EDF general reserve and 
EUR  350  000  000  from  the  general  budget  of  the  Union,  including  from  the  European 
Neighbourhood  Instrument  (ENI).  The  EFSD  Guarantee  Fund  may  also  be  endowed  by 
voluntary  contributions  from  Member  States  or  other  contributors,  returns  on  invested 
resources, revenues and amounts recovered from defaulting debtors. Estonia, Czech Republic, 
Denmark  and  the  Bill  and  Melinda  Gates  Foundation  signed  by  end-2019  agreements  for 
additional contributions totalling c. EUR 49 million.4   

The  Guarantee  Fund  was  established  in  2018  and  the  first  payment  accounting  for 
EUR 75 million  was  made  in  November  2018.  By  31  December  2019  the  total  payments 
received from the EU Budget into the Guarantee Fund amount to EUR 600.1 million.  Until 
end-2019, there have been no calls on the EFSD guarantee. 

5. ASSESSMENT OF THE ADEQUACY OF THE TARGET AMOUNT AND THE LEVEL 
OF EFSD GUARANTEE FUND  

As  of  31  December  2019  in  total  three  EFSD  guarantee  agreements  that  amount  to 
EUR 165 million were concluded, including one signed in 2018, and two in 20195.   

The  target  amount  of  the  EFSD  Guarantee  Fund  has  been  set  at  50%  of  the  total  EU 
Guarantee  obligations.  The  total  payments  received  as  of  31  December  2019  from  the  EU 
Budget into the Guarantee Fund amount to EUR 600.1 million, thus the provisioning covers 
in full the risk of the guarantees signed.  

In line with Article 4.2 of the EFSD Regulation, in the operational management of the EFSD, 
the  Commission  is  supported  by  the  Guarantee  Technical  Assessment  Group  (G-TAG) 
comprised of credit-risk experts drawn from several European financial institutions. The role 
of  G-TAG  is  to  provide  independent  and  impartial  technical  expertise  on  banking  related 
matters  to  the  Commission,  to  support  its  decisions  related  to  the  allocation  of  the  EFSD 
Guarantee,  as  well  as  on  the  risk-monitoring  during  the  implementation  of  the  projects 
benefitting from the guarantee. 

4 Estonia: EUR 100,000; Czech Republic: EUR 300,000; Denmark: c. EUR 9.4 million; Bill and Melinda Gates 

Foundation: c. EUR 39.2 million (USD 50 million) – with EUR 19.2 million paid-in. 
5 And additional four for the total amount of EUR 196 million had been signed by April 2020. 

7