Development effects

In addition to the “do no harm” principle of its environmental and social responsibility assessments, as a development finance institution, Finnfund seeks to achieve significant direct environmental and social effects in the companies it finances and among their closest stakeholders. Finnfund financing can also achieve positive development impacts indirectly, benefitting the whole of society in the projects’ target countries.

Many companies financed by Finnfund are significant taxpayers, directly or indirectly, in their target countries. For example companies financed directly or indirectly by Finnfund in 2014 reported payments of corporate tax and other tax-like payments to government totalling about EUR 277 million¹⁾. EUR 86 million of this, 31 per cent, was paid as corporate tax. At the time of writing, data for 2015 is not yet available.

Of corporate taxes and other payments to government, EUR 114 million was paid by projects located in African countries (both direct Finnfund investments and fund investments by Finnfund portfolio companies). Projects located in Latin America paid EUR 75 million in corporate taxes and similar charges. Projects in Asian countries and Russia paid EUR 72 million, of which Russia accounted for EUR 13 million and China EUR 6 million.

Grouped by type of project, corporate taxes and other payments to government were distributed as follows: direct investments (in manufacturing, infrastructure and forests) EUR 84 million; financial institutions and leasing companies EUR 44 million; and fund portfolio companies EUR 149 million. Payments by fund portfolio companies constituted about 54 per cent of all taxes and similar charges paid by Finnfund direct and indirect investments. About 30 per cent, about EUR 45 million, of taxes and similar charges paid by fund portfolio companies were corporate tax; the rest consisted of other official payments to government. 

International Development Finance Institutions have jointly agreed that jobs and corporate tax and other payments to government are development effects to be monitored and reported by all EDFI members. The target set for Finnfund by ownership steering is that 75 per cent of projects should be located in lower and lower-middle income countries. In 2015 92 per cent of new investment decisions were for projects located in such countries. Directing capital to these countries is a significant development effect in line with Finnfund’s mandate.

The assessment of development effectiveness is a procedural part of Finnfund’s investment process. In addition to monitoring at the portfolio level, Finnfund studies projects under preparation to assess:

• their compatibility with Finnfund strategy and function: for example, in managing environmental and social affairs and in their impact on curbing climate change
• their economic sustainability and effects on different stakeholder groups: for example, the effect on customers and consumers of final products
• and Finnfund’s own role in the project: for example, the catalytic role of finance and its expert/non-financial role.

^{1) This is the total of all corporate tax and other payments to government paid by the companies financed. There is no technically reliable way to isolate the proportion attributable to financing from Finnfund.}