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: 2021-07-26
Institutions: Directorate-General for International Partnerships, 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, 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 

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

3. Management of the EFSD Guarantee Fund in 2020 .............................................................. 3 

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

3.2. Market developments ...................................................................................................... 3 

3.3. Composition and key characteristics of the portfolio ...................................................... 4 

3.4. Performance .................................................................................................................... 5 

4. Financial accounts .................................................................................................................. 5 

4.1 Financial statements of the EFSD Guarantee Fund as of 31 December 2020 ................. 6 

4.2. Provisioning .................................................................................................................... 7 

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

1 

 
 
 
 
 
 
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 Fund1. 

1 COM (2020) 346 

2 

 
 
                                                 
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 
in  Commission  Decision  C (2017) 7693  of 
22 November 2017, applying also to 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. 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.  

3 

 
 
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:  

4 

 
 
BB-; 3,0% 

Cash (AAA); 
13,9% 

BBB-; 10,3% 

BBB; 2,1% 

BBB+; 0,6% 

MMF (A); 
11,3% 

MMF (A-); 
2,5% 

AAA; 12,6% 

A-; 8,8% 

A; 5,8% 

AA-; 7,5% 

A+; 2,8% 

AA+; 
6,5% 

AA; 12,2% 

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. 

5 

 
 
 
 
4.1 Financial statements of the EFSD Guarantee Fund as of 31 December 2020  

total  assets  of 

The 
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) 

Revenue from operating activities 

Expenses from operating activities 
Other expenses from operating activities 
     Audit fees 

2020 

2019 

EUR 
- 

- 
(15 000) 
(15 000) 

EUR 
- 

- 
(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 

Financial expenses  
Interest expenses on cash and cash equivalents 
Realised losses on sale of AFS assets 
Custody fees and other financial expenses 

415 918 
152 600 
- 
152 600 
- 
250 985 
12 333 

(1 024 364) 
(197 065) 
(727 658) 
(99 641) 

188 403 
(54 689) 
- 
(54 689) 
- 
240 839 
2 253 

(448 536) 
(404 272) 
(15) 
(44 249) 

FINANCIAL RESULT 

(608 446) 

(260 133) 

ECONOMIC RESULT OF THE YEAR 

(623 446) 

(275 133) 

6 

 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet as at 31 December 2020 

(amounts expressed in EUR, in brackets – expenses/losses, no brackets – revenue/gains) 

ASSETS 

NON-CURRENT ASSETS 
Available for sale financial assets 

CURRENT ASSETS 
Available for sale financial assets 
Receivables (i.e. securities lending fees) 

Cash and cash equivalents 

Current accounts 
Accrued interest on cash and cash equivalents 

31 December 2020 
EUR 
435 238 107 
435 238 107 

31 December 2019 
EUR 
348 061 980 
348 061 980 

368 878 530 
256 757 770 
2 197 

112 118 563 
112 166 318 
(47 755) 

251 527 281 
246 643 539 
1 595 

4 882 147 
4 885 215 
(3 068) 

TOTAL ASSETS  

804 116 637 

599 589 261 

NET ASSETS AND LIABILITIES 

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

CURRENT LIABILITIES 
Other payables 

31 December 2020 
EUR 
804 091 888 
798 968 935 
6 090 099 
(343 700) 
(623 446) 

31 December 2019 
EUR 
599 567 587 
600 100 000 
(188 713) 
(68 567) 
(275 133) 

24 749 
24 749 

21 674 
21 674 

TOTAL NET ASSETS AND LIABILITIES 

804 116 637 

599 589 261 

4.2. Provisioning 

The  EFSD  Guarantee  Fund  is  provisioned  from  the  general  budget  of  the  Union  and  the 
European Development Fund (EDF). For the 2014-2020 MFF, 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. The EFSD Guarantee Fund may also 
be endowed by voluntary contributions from Member States and other contributors, returns on 
invested resources, revenues and amounts recovered from defaulting debtors. Estonia, Czech 
Republic,  Denmark  and  the  Bill  and  Melinda  Gates  Foundation  provided  additional 
contributions totalling EUR 49 million.2  

The  Guarantee  Fund  was  established  in  2018.  By  31  December  2020,  the  total  payments 
received  from  Union  funds  (both  general  budget  of  the  EU  and  EDF)  into  the  Guarantee 

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

Foundation: EUR 39.2 million (USD 50 million)  

7 

 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
                                                 
Fund, augmented by voluntary contributions, reached EUR 799 million. Until end-2020, 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  

The EFSD Regulation sets the target amount of the EFSD Guarantee Fund at 50% of the total 
EFSD  Guarantee  obligations  covered  by  the  general  budget  of  the  Union.  Additional 
voluntary  contributions  from  Member  States  or  other  contributors  are  provisioned  at  100%. 
The current level of the net assets in the EFSD Guarantee is EUR 804 million.  

in 

As  of  31  December  2020, 
total  eighteen  EFSD  guarantee  agreements  worth 
EUR 1,549 million were concluded with ten financial institutions, exceeding the initial EFSD 
Guarantee  capacity  as  a  result  of  additional  contributions  from  donors.  The  EFSD  aims  to 
address  market  failures  and  suboptimal  investment  situations  and  encourage  private  sector 
financing.  In  the  course  of 2020,  as  the  COVID-19  virus  spread  around  the  globe,  the 
Commission decided to use the EFSD Guarantee as a tool to help Partner Countries overcome 
the crisis. This meant that the EFSD Guarantee needed to adapt quickly to the economic needs 
created by the global pandemic by focusing on Micro, Small and Medium-Sized enterprises 
(MSMEs),  local  currency  financing,  and  support  to  the  health  sector.  Previously  signed 
agreements covering MSME financing were topped up, new agreements were negotiated and 
signed.  A  particularly  important  shift  was  a  new  agreement  to  provide  EUR  400  million  in 
financing towards the distribution of COVID-19 vaccines to Partner Countries. 

In  acting  as  manager  of  the  EFSD  Guarantee  and  of  the  related  Guarantee  Fund,  the 
Commission  is  responsible  for  ensuring  that  the  required  level  of  the  liquidity  cushion 
is maintained. 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,  including  for  risk  monitoring  during  the  implementation  of  the  projects 
benefitting from the guarantee. 

As  assessed  by  the  G-TAG  in  their  opinion  of  January  2021,  based  on  the  December  2020 
data,  the  probability  of  depleting  the  EFSD  Fund  over  its  entire  lifetime  (estimated  around 
19 years),  assuming  a  75%  average  price  subsidy,  is  comfortably  below  the  EFSD  risk 
tolerance  limit  of  10%  under  the  average  scenario.  This  is  also  the  case  for  the  average 
scenario, assuming a 100% subsidy and is in line with the limits set by the EFSD Guarantee 
Risk Policy Guidelines. Nonetheless, the EFSD’s risk tolerance limit will be exceeded under 
the high-risk scenario assuming 75% or 100% fee subsidies. The probability of depleting the 
EFSD Fund over the 1-year horizon is less than 0.02% assuming 75% or 100% fee subsidies.  

8