The global economy in 2023 developed better than many predicted at the start of the year. Inflation decreased toward the end, and the global growth rate of 3.1% exceeded expectations. However, we see large variations, also in Norfund’s markets. India’s economy grew by 6.7%, Ivory Coast’s by 6.2%, while Malawi and South Africa saw growth below 1%. South Africa’s GDP per capita has regressed to 2016 levels. Additionally, the combined GDP of Least Developed Countries (LDCs) in 2023 was 10% lower than if the growth rates pre-pandemic had persisted.
Interest rates remained high in 2023, and the consistently high dollar rate, combined with macroeconomic instability, led to capital being withdrawn from many emerging economies. The burden of debt in several of Norfund’s markets increased significantly throughout the year. There is a substantial liquidity problem in many of our markets and combined foreign direct investments in developing countries fell last year by 9% to 841 billion USD. UNCTAD reported a fall of 12% in developing countries in Asia and 1% in Africa. The IMF estimates that low-income countries will need to refinance around 60 billion USD external debt each year, three times higher than the average in the decade leading up to 2020. The macroeconomic picture for Norfund’s markets is still characterized by uncertainty.
Job creation continues to be one of the biggest challenges in many of Norfund’s markets. A study from the Global Center for Development shows that we should expect around 1.4 billion new job seekers in low- and middle-income countries by 2050, most of them in Sub-Saharan Africa. At the current rate there will only be job opportunities for 590 million, which will only cover just over a third of them. In South Africa, youth unemployment is estimated at between 60 and 70%. This illustrates how growth and job creation are central challenges in Norfund’s markets.
In Norway and other OECD countries, significant attention and increasing development aid has been directed to Ukraine, the climate, and, in the wake of the war in Gaza, to Palestine. This means less development aid budgets are available for job creation and the fight against poverty. Transfers to Norfund’s Development Mandate have been stable in nominal Norwegian kroner for several years, and during the 2019-2023 period Norfund’s portion of the Norwegian aid budget sank from 5.2% to 2.9% (not including transfers to the Climate Investment Fund). The World Bank’s new strategy has expanded to include climate-related issues. This is also an example of how many actors are tasked to do more and deliver on several fronts while budgets are tight.
2023 was the warmest year on record. A report from Climate Policy Initiative estimated that climate finance needs to at least quintuple from 1.3 billion USD in 2021-2022. In emerging markets, it needs to grow even more. This shows what an important role the Climate Investment Fund plays.
Despite this backdrop, Norfund’s investments in 2023 remained stable: 6.5 billion NOK combined for the two mandates (Development and Climate). A stable commitment level partly reflects a challenging market in 2023, and that some larger investments were committed at the start of 2024 and not the end of 2023. A high commitment level was made possible partly by the sale of SN Power (completed in 2021), alongside the recycling of capital through exits from investments and repayment of loans, as well as the annual capital injections from the Norwegian State.
With continued capital injections from the state to both mandates, Norfund will be able to maintain a stable investment level in the years to come.
About Norfund
Norfund’s mandates and strategy
Norfund was founded in 1997 as Norway’s most important tool for private sector development in developing countries. Through equity and other risk capital, as well as loans and guarantees, Norfund helps to develop sustainable businesses in developing countries. The aim is to establish viable, profitable activities that otherwise would not be initiated because of the high risk involved.
Norfund is a responsible owner that adjusts its ownership approach depending on the sector, instrument, and risk. For some investments (such as equity investments where we have a significant minority share) we will have an active role, while with others we will be less active (for example with loans to banks). However, we always consider ourselves a responsible owner with high ethical requirements. We always aim to exit the investment when our role as investor is no longer necessary so that the capital can be recycled and be put to work through new investments.
In all investments, Norfund works with strong, local partners. These partners include the businesses we invest in, their owners, leadership, employees, and co-investors locally and internationally. This is central to our investment approach and positions us to invest responsibly and deliver significant development and climate effects alongside a healthy profit.
Since 2022 Norfund has also been responsible for the Climate Investment Fund. This new mandate builds on Norfund’s long experience with investments in renewable energy, and there are strong synergy effects between the two mandates.
For the Development Mandate, Norfund’s goal is to create jobs and improve lives by investing in business that contribute to sustainable development. This mandate comprises four investment areas, with Financial Inclusion being the largest. This area invests in banks and other financial institutions, microfinance, insurance, and finance technology. The second largest investment area is Renewable Energy, which includes solar, wind, hydropower, and decentralized energy solutions. The investment area Scalable Enterprises comprises agribusiness, manufacturing, and fund investments. Finally, Green Infrastructure invests in water and waste management. Each of these four investment areas have goals that directly contribute to the UN’s Sustainable Development Goals. Under the Development Mandate, Norfund prioritizes investments in countries with limited access to capital, and especially Least Development Countries as well as Sub-Saharan Africa and uses equity as the preferred instrument. The Norwegian Ministry of Foreign Affairs (MFA) has decided that around 60% of the state budget portion allocated to Norfund should be invested in renewable energy (starting in 2022).
For the Climate Mandate (Climate Investment Fund), Norfund’s goal is to promote the transition to net zero in emerging markets. Under the Climate Mandate Norfund mainly invests in the production and development of renewable energy, as well as areas enabling technologies. Norfund prioritizes equity investments for this mandate as well. The Climate Mandate is primarily for middle-income countries where there are even bigger opportunities for reducing emissions.
Financing
Norfund is financed through annual capital allocations from the Norwegian State, along with the returns from the investments. In 2023, the state allocated 1.7 billion NOK under the Development Mandate and 1 billion NOK under the Climate Mandate. In addition to the capital allocation, Norfund received 15 million NOK for Business Support, a technical assistance scheme.
Returns in the form of interest and dividends from investments, loan repayments, and exits from investments make up an increasing portion of the fund’s available investment capital. This allows Norfund to increase its investment activity, thereby contributing even larger positive effects for development and the climate.
Additionality
Most countries Norfund invests in are not very attractive to international investors due to high risk. Norfund’s competence, willingness, and ability to manage risk is therefore important when investing capital in these countries and is the key to successful investments. Norfund needs to be additional in all investments. The fund is financially additional by investing capital that companies would otherwise have trouble accessing, due to a scarcity of capital and the high risk. Norfund is value additional by contributing value beyond capital, by being an active owner, promoting environmental and social standards, and by improving business practices. Norfund is a minority investor and in this way also helps to mobilize capital from other investors both in Norway and internationally. Norfund’s ambitions for additionality in each investment area are registered and reported to the OECD development committee, as well as on Norfund’s website.
Norfund’s total portfolio in 2023
In 2023, the portfolio (both mandates combined) delivered an internal rate of return (IRR)1 of 2.7% in local currency and 4.7% in NOK. Since inception the portfolio has yielded an IRR of 4.9% in local currency and 7.9% in NOK. As of 31.12.2023 Norfund’s total committed portfolio was 36.2 billion NOK. During 2023 the fund committed 6.5 billion NOK. The results of the Development Mandate and Climate Mandate are detailed below.
Development Mandate – portfolio in 2023
In 2023 the Development Mandate yielded returns measured by IRR of 1.8% in investment currency and 4.1% in NOK. Since inception, the portfolio has had an IRR of 4.9% measured in investment currency and 7.8% in NOK. The returns for 2023 are well below the historical average, primarily due to lower returns in renewable energy driven by higher capital costs. We still consider this an acceptable return, given how turbulent the markets were in 2023 and considering that the overall portfolio has a return in line with expectations.
At the close of 2023, the committed portfolio was 32.5 billion NOK. Norfund committed 4.9 billion NOK under the Development Mandate in 2023, spread across 21 new investments and 18 follow on investments.
The commitments for the year were spread across Norfund’s investment areas, with 2.3 billion NOK in Financial Inclusion and 1.4 billion NOK in Renewable Energy. Commitments in Scalable Enterprises (agribusiness and manufacturing) comprised 804 million NOK, while 412 million NOK was committed via funds.
Commitments in Least Developed Countries (LDCs) made up 38% of the portfolio at the close of 2023, while Sub-Saharan Africa made up 64%. Equity made up 71% of the portfolio at the end of the year. The key performance indicator (KPI) for renewable energy was at 68% at the close of 2023. Norfund’s portfolio is therefore in line with the KPIs set by the board, which mandate at least 33% of the portfolio in LDCs and 50% in Sub-Saharan Africa and 70% equity investments. Additionally, Norfund’s statutes require that 60% of Norfund’s capital allocation over time should be invested in renewable energy, a target that was also met.
Norfund prioritizes investment areas where there are significant opportunities for development effect and impact. There has been developed a theory of change for each investment area, that shows how Norfund’s capital and competence contributes to development effects. Norfund’s investments contribute directly to the UN Sustainable Development Goals. For the Development Mandate, these are SDG 1 (No poverty), 7 (Affordable and clean energy), 8 (Decent work and economic growth) and 9 (Industry, innovation, and infrastructure). Norfund annually gathers data on development effects from our portfolio companies, both from direct and indirect investments through platforms and funds. The data is gathered based on harmonized indicators. In 2023, Norfund gathered data from 954 companies (with a 100% response rate). To highlight development in portfolio companies, we also report changes from 2022 to 2023 for the companies in the portfolio that have reported for two consecutive years (82% of the companies) .
As part of the strategy for 2023-2026, Norfund has set ambitions for each investment area that reflect the accumulated organic growth (the development in a company after Norfund invested) based on sector relevant parameters. The ambitions are set for the whole strategy period and not for each year. After the first year of the strategy period, we see that investments in Financial Inclusion and direct investments in Scalable Enterprises are well on their way to reaching their ambitions for the period. Indirect investments through funds will reach the ambitions for revenue growth if the same trend continues. At the same time, these investments have created fewer jobs than needed to meet the ambition for the period. Further, investments in Renewable Energy delivered markedly lower results than are needed to meet the ambitions for this period.
In addition to these quantified ambitions, Norfund measures development effects at the portfolio level. At the close of 2023, there were 625,000 jobs in portfolio companies under the Development Mandate. 64% of these were in Africa and 27% were in LDCs. Women comprised 38% of the jobs and youth under 25 years comprised 19%. In 2023, there were 37,200 new net jobs, reflecting a 9% increase and with the majority of these jobs in Africa. Taxes and fees paid by portfolio companies totaled 32.7 billion NOK, with 21 billion NOK paid in Africa. Norfund uses the Joint Impact Model to estimate indirect effects of investments. These estimates show that the ripple effects of Norfund both upstream (value chain and suppliers) and downstream (possible effects on access to finance and energy) are substantially higher than the direct effects. These are described in more detail in the annual report. It should be emphasized, however, that these numbers are modelled estimates and as such come with a high degree of uncertainty.
The numbers for development effects are unattributed, meaning they show the total effect of the portfolio companies and do not consider Norfund’s investment share. More information on Norfund’s development effects is available in the annual report.
Climate Mandate (the Climate Investment Fund) – portfolio in 2023
The Climate Mandate came into effect in 2022. In 2023, the Climate Mandate delivered an IRR of 21.9% measured in investment currency and 17.8% in NOK. Since inception, the portfolio has had an IRR of 24.4% in investment currency and 20.4% in NOK. These numbers must be viewed in the context that this is a new fund with few investments and no exits. At the close of 2023, the portfolio had 3.8 billion NOK in commitments. In 2023, large investments included SAEL, a company that produces renewable energy based on solar and biomass in India. For the Climate Mandate, the board has set a guiding risk threshold for exposure to any one country at 25%. The fund is primarily invested in India and South Africa, with a smaller investment in Sri Lanka. Work is being done to diversify the portfolio geographically.
The Climate Mandate investments also contribute directly to the UN Sustainable Development Goals. These are SDG 13 (Climate action), 7 (Affordable and clean energy) and 8 (Decent work and economic growth). In 2023, Norfund’s commitments financed 4,244 MW of renewable energy and avoided an estimated 8.5 million tons of emissions annually (ex ante). In addition to this, Norfund invested in a transmission line that will connect to several wind power plants, leading to an estimated 5.8 million tons of avoided annual emissions. These are strong results seen against the ambitions for the strategy period for the Climate Mandate (2022-2026) of 9 GW renewable energy financed and 14 million tons of avoided annual emissions. At the close of 2023, there were 8,000 jobs in portfolio companies under the Climate Mandate. Most of these were temporary jobs because of high activity in the construction phase of power plants. These numbers, as is the case with the Development Mandate, are not attributed, and do not account for Norfund’s investment share.
1 IRR in Norfund is at a gross rate as costs related to investing in the instrument such as due diligence, evaluation and other direct or indirect costs are not considered.
Financial statements
Norfund ended the year with an operating income of 1,554 million NOK and a positive result after taxes of 1,896 million NOK. The result was significantly influenced by currency effects due to the weaker Norwegian krone against our primary currency, the USD, although this impact was less pronounced than in 2022. Currency effects on the results were 0.4 billion NOK compared to 2.1 billion NOK in 2022.
The historically weak NOK gives investments and cash holdings a higher value measured in kroner and shows the impact that currency fluctuations have on income and financial statements. The effects will reverse if we see a corresponding strengthening of the NOK. For the board, the relevant indicator is IRR in investment currency as this better captures Norfund’s underlying performance.
Without currency effects, the result for 2023 is 1.5 billion NOK, an increase of 1.4 billion NOK compared to 2022. This is primarily due to a significant increase in interest income from the investment portfolio, realized gains as well as liquid assets placed in a bond portfolio.
The interest income from the portfolio has increased significantly to 680 million NOK as the loan portfolio grew by 26% in NOK while the floating interest rates have continued to increase throughout 2023. The accounts show a realized gain of 467 million NOK, mostly from Green Resources (213 million NOK) and Scatec Upington (186 million NOK). Further, the company received 370 million NOK in dividends, with the most important of these being Arise B.V. (180 million NOK), AfricInvest Financial Inclusion Vehicle (44 million NOK) and Klinchenberg B.V. (40 million NOK).
Labor costs have increased by 20% compared to 2022, to 219 million NOK. Both the investment and corporate functions at Norfund were strengthened throughout the year. This also means an increase for other cost areas, but on balance within expectations. Total costs measured in percentage of committed portfolio remain stable at 1%.
The investment portfolio has been written down by 460 million NOK in 2023, of which 121 million NOK is realized loss. The ongoing conflict in Ukraine still affects the portfolio and additional write downs were necessary last year. This also applies to the situation in Myanmar where the situation continues to be challenging.
Norfund’s total balance at the close of 2023 was 42 billion NOK. The balance increased by 4.6 billion NOK from 31.12.2022. Total earnings added to equity were 1.9 billion NOK and the annual capital allocation from the state budget was 2.7 billion NOK. Value adjusted equity based on estimated market value for Norfund’s portfolio as of 31.12.2023 was 46.6 billion NOK.
At the close of 2023 Norfund had outstanding, unpaid commitments of 7.4 billion NOK. Cash holdings were 5 billion NOK, in addition to current assets of 8.1 billion NOK. Of the liquidity holdings, 3 billion NOK is earmarked for the Climate Investment Fund for investments during 2024-2026. The board considers the liquidity as sound and confirms that the going concern assumption applies. The Board of Directors’ assessment concluded that the financial statements for 2023 provide a true and fair view of Norfund’s financial position.
Organization, environment, and responsible corporate tax
Corporate governance
The General Assembly is Norfund’s supreme body. Corporate governance is undertaken through General Assembly resolutions, including the adoption of and any amendments to the Norfund statutes. In 2023, there was an extraordinary General Assembly in conjunction with choosing a new accountant. The Ministry of Foreign Affairs receives quarterly reports and there are regular contact meetings between Norfund and the Ministry throughout the year.
Norfund’s Board of Directors is elected by the General Assembly. Two employee members are elected by and among the fund’s employees. The board consists of nine members. The Risk and Audit Committee consists of a committee leader and two members selected among the board’s members. The committee serves as a preparatory committee and final decisions are made by the board. In 2023, the board held seven meetings and there were seven meetings of the Risk and Audit Committee. The board and Risk and Audit Committee works on an annual schedule that includes a reporting cycle, regular updates, deep dives, and competence building. Norfund has Directors and Officers liability insurance through AIG that covers board members and externally appointed board members in portfolio companies.
Norfund has a framework of governing ranging from the Norfund Act, statues and policies adopted by the board to operational guidelines, routines, and procedures for the follow-up on investment activities.
The structure and guidelines are updated regularly and tailored to Norfund’s work. The investment committee reviews investment proposals and contributes to quality assurance. In 2023, the committee consisted of nine people, three of whom are external. The credit committee reviews loans to financial institutions and consists of five members, one of whom is external. Both committees review investments of between 4 million USD and 20 million USD, and investments are approved by the CEO. Both committees also submit their recommendations on investments above 20 million USD, but these are approved by the board. Smaller investments are raised with the board when needed, for example if there is high risk or reputational sensitivity. Investments up to 4 million USD are reviewed and approved by the management team.
Data, risk management, and internal audits
Taking on risk is key to Norfund’s mandate. The types of risks Norfund takes and how they are managed are outlined in Norfund’s Risk Appetite Statement, approved by the board. The statement describes two risk categories. The first relates to where and in what Norfund invests (markets, instruments, and currency risk). These risks are managed through Norfund’s market insight, local presence, and portfolio diversification. The second category relates to how investment partners are selected and how Norfund operates and runs investment and operational processes (for example partner and corruption risk, environmental and social factors, and health and safety). These risks can be mitigated by implementing appropriate systems and processes, conducting regular training, contractual requirements, and internal audits and compliance.
The Enterprise Risk Management framework is a tool for the leadership and board to identify, understand, and address key operational risks. The framework’s risk oversight is updated every six months and involves dedicated risk owners. The management team’s recommendations for the top ten risk areas are discussed with the Risk and Audit Committee before being presented to the board. Proposals for areas subject to external audit are considered in conjunction with the top ten risk areas. The committee reviews proposals for potential areas for audit and provides recommendations, which are addressed and approved by the board.
Two important risk areas highlighted in 2023, were the unstable macroeconomic and political landscape, and the revision process of the framework for private sector investment as Official Development Assistance (ODA) eligible within the OECD – a process spanning many years. The latter was particularly important for Norfund, as it determined whether capital allocations to Norfund could be approved as ODA. After a long and challenging process with intensive efforts from Norfund in collaboration with the Ministry of Foreign Affairs and Norad, the revised framework is suitable also for an organization like Norfund.
Norfund has expanded its country risk tool, allowing the monitoring of portfolio exposure across political, economic, environmental, social, and business risks. Using this tool, the board has defined risk thresholds for individual countries and groups of countries. For the Climate Mandate, exposure in India and South Africa is currently high, but this is expected as the fund is still in its initial phase.
Norfund has zero tolerance for corruption and financial irregularities in its portfolio companies and has established systems to prevent, uncover, report, and address such cases. In 2023, there were 18 cases of alleged or actual financial irregularities in the portfolio. These cases were followed up in line with established procedures, primarily within the affected portfolio companies. A few cases are still being followed up, and one case was reported to the Ministry of Foreign Affairs.
In addition to reports of purported financial irregularities from portfolio companies, Norfund received four reports concerning other issues, mostly related to employment conflicts. Furthermore, four reports were received through our external whistleblowing channels, which primarily concerned undocumented allegations. Norfund has followed up on all cases maintaining confidentiality and integrity of the whistleblowers in accordance with internal procedures. None of the allegations have resulted in criminal or formal proceedings.
Organization and operational efficiency
Norfund has experienced significant growth over the last few years, in the form of increased investment volume, a growing portfolio, and more employees. In 2023, recruitment focused on strengthening corporate staff in finance and legal, as well as increasing the capacity of the Renewable Energy department. The regional offices also grew, reflecting the ambition to primarily grow the organization close to the markets in which Norfund invests, with 30% of new employees joining a regional office. Approximately two thirds of Norfund’s employees work directly with investments, while one third work in corporate functions.
In 2023, an external study was undertaken to evaluate Norfund’s cost effectiveness compared to a selection of other DFIs. The study showed that Norfund is the most cost effective, measured by operating costs as share of assets under management. For both 2022 and 2023, this ratio was 1%. The goal is to remain below the average for comparable institutions in development finance. However, it is important to emphasize that this ratio should not be as low as possible; the goal is to find the right cost level that ensures a robust organization suitable for Norfund’s mandate and risk profile.
Increased complexity poses a risk as an organization grows. Norfund recognizes the importance of a strong culture to ensure that the organization grows and develops well. This is expressed through “The Norfund Way”, which consists of five values that describe the attitudes and behaviors essential for delivering on Norfund’s mandate. In 2023, the organization placed special emphasis on diversity, equity, and inclusion. With external support, Norfund mapped how these themes are experienced within the organization and identified ways to strengthen inclusion and psychological safety. The results were followed up with awareness raising measures throughout the organization. An internal advisory group was also established, featuring employees representing a diversity of gender, age, position, and background. The work continues in 2024.
At the close of 2023, Norfund had 144 employees, with 134 of them in permanent positions, representing 24 nationalities. In addition to the office in Oslo, Norfund has five regional offices in Accra, Cape Town, and Nairobi in Africa, Bangkok in Asia, and San José in Central America. Strong regional offices with experienced teams that work closely in our markets are decisive for a successful investment strategy.
The activity duty and the duty to issue a statement (aktivitets- og redegjørelsesplikten) is provided in a separate report on Norfund’s website. Norfund has guidelines for recruitment, competence building, and gender equality, as well as procedures for employee follow-up and remuneration. In 2023, 11 employees participated in Norfund’s “desk swap” program, which allows employees to work at another office for a short period. These desk swaps have proven beneficial for employees, strengthening company culture, promoting knowledge sharing, and increasing motivation amongst employees.
Norfund is hiring more young employees, reducing the average age from 41.4 years old in 2019 to 40.1 years old in 2023. The gender balance is strong, with 49% women and 51% men. In leadership roles, 43% of the leaders are women. In 2023, Norfund hired 28 new employees, of which 10 are temporarily employed. Measured in permanent FTEs, Norfund’s turnover in 2023 was 6%.
During 2023, the intern program continued, which aims to increase diversity and profile Norfund as an attractive workplace. Six new graduates participated.
Sick leave amongst employees was at 2.9% in 2023. The internal goal is to not exceed 3%. The Board of Directors does not deem it necessary to implement special measures relating to the working environment or designed to promote the aims of the Norwegian Anti-Discrimination Act and Anti-Discrimination and Accessibility Act.
Norfund monitors the annual salary levels across functions with a particular focus on gender-related salary discrepancies. The findings show there are no systematic differences in salary between genders. More information can be found in the activity duty statement (aktivitets- og redegjørelsesplikten). Norfund aims to be competitive, but not leading when it comes to salary. The company finds is increasingly difficult to offer compensation and benefits that attract the right talent, and therefore a task force has been established to assess compensation and benefits in Norfund. Guidelines for executive pay and reports on salaries and other remuneration of senior executives are both published on Norfund’s website.
Responsible business
Social responsibility is a key starting point for Norfund, both for our own operations and our portfolio companies. The cross-cutting issues of Norwegian development aid – human rights, gender equality, anti-corruption, and climate & environment – are all integrated into our efforts. Norfund is a responsible investor that contributes to the value creation of its portfolio companies. In companies where we invest significant equity, we can appoint board members who also receive regular information and competence building in areas particularly important for Norfund, such as corporate governance, climate, and responsible business.
In 2023, Norfund strengthened its work on climate significantly. The ambitions and initiatives in this area reflect several factors: that climate risk can impact a company’s ability to succeed; the expectations of our owner; and Norfund’s role as an investor in developing countries with challenges and opportunities different from those in developed markets. Like the other European Development Finance Institutions, Norfund aims for net zero emissions in the portfolio by 2050 and assesses Paris alignment and climate risk for all new investments. Norfund reports according to the TCFD framework, a separate publication on the website.
In 2023, we developed a tool to assess whether new investments align with the Paris Agreement and initiated a process for Norfund’s work towards net zero. We estimated the portfolio’s emissions for the first time. Due to data challenges, the estimates are based on 2022 numbers and covering 71% of the portfolio. The emissions of Norfund’s portfolio companies are at just over 4 million tons of CO2-equivalents in scope 1 and 2. Attributed to Norfund emissions are approximately 265,000 tons, calculated using the PCAF (Partnership for Carbon Accounting Financials) method for attribution. Scope 3 emissions, which include emissions from companies in financial institutions’ loan portfolios, are significantly larger and come with even greater uncertainty. The quality and availability of data is a challenge in our markets. Effective integration of climate assessments is challenging, and the work will continue next year.
Norfund is certified as an Eco-Lighthouse and uses this framework to improve the internal environmental work. Emissions from Norfund’s operations were 997 tons of CO2-equivalents in 2023, which mostly comes from air travel.
Norfund systematically integrates environmental and social factors throughout the investment process. We adhere to the International Finance Corporations (IFC) performance standards in this work, specifically designed for investments in developing countries. By applying these operational standards, Norfund meets the expectations of responsible business conduct in the whitepaper on ownership policy, that applies to all companies with direct state ownership (Meld. St. 6 (2022-2023)). Norfund’s work is therefore in line with the state’s expectations for due diligence using established methods.
In 2023, Norfund’s work with environmental and social factors was strengthened through an enhancement of our Environmental and Social Management System (ESMS) and through competence building for investment employees.
Good working conditions are a requirement for all companies in Norfund’s portfolio. Norfund monitors health, safety and environment (HSE) in all its investments, with a particular focus on training and compliance with HSE procedures. The investment agreements contain a requirement that serious accidents and fatalities must be reported. In 2023, Norfund regrettably registered 19 work-related deaths in companies where we are directly invested. These incidents are reported to the board and, in special cases, also to the Ministry of Foreign Affairs. Two such incidents were reported to the MFA in 2023. Norfund follows up all fatalities related to its investments to ensure that they are investigated, that safety procedures are modified if necessary, and that the next of kin receive the compensation to which they are entitled. 12 of the fatalities reported in 2023 were traffic related. Norfund has decided to allocate funds from the Business Support facility to support portfolio companies’ work to strengthen traffic safety.
Norfund has a firm policy on responsible tax which is aligned with the European DFIs. To supplement existing guidelines, we introduced routines for external assessment of structures used when investing through third countries, to ensure responsible taxation beyond the choice of domicile. Overall, the use of third countries is relatively high, which is due to the number of investments in regional funds and through structures where use of third countries is seen as necessary. Through assessing both domicile and structure in line with Norfund’s responsible tax policy, the use of third countries is considered responsible.
Norfund has a Business Support Program funded by the Ministry of Foreign Affairs. The purpose of this facility is to enhance the development effects of investments. For example, Norfund supports capacity development and climate adaptation, training for smallholder farmers, and digitalization of a training program for women entrepreneurs. In 2023, 16 new projects received funding through this scheme. 22.6 million NOK went to this portfolio which consists of 53 active projects.
Norfund takes part in 2x Global, an international collaboration between investors to advance gender equality. In 2023, we continued to strengthen gender equality in individual investments, especially in Latin America, and expanded our program for leadership development with The Boardroom Africa, aimed at female leaders. We also collaborated with our British sister organization to pilot a training program addressing gender-based violence and harassment (GBVH), which will be launched in 2024. Many of these initiatives depend on financing through the scheme, which has limited funding.
Norfund maintains regular dialogue and cooperation with civil society organizations and other partners. In 2023, there was a dialogue meeting on Norfund’s development effects and responsible business for all interested civil society organizations. There were also bilateral meetings on topics like textile production, the cocoa industry, transparency, climate, renewable energy in Latin America, and gender equality. At the annual Norfund Conference, we again raised dilemmas and challenges. Norfund also participated in several debates during Arendalsuka.
The Norwegian parliament established a separate Project Development and Risk Mitigation Facility (PDRMF) in 2019 now named Frontier Facility to better communicate its purpose. Through this, Norfund can provide early-stage project development and risk mitigation. The facility is used for projects with higher risk than the investments in Norfund’s core portfolio and is managed separately. The current portfolio consists of eight projects of 123.7 million NOK in total investments. Through the Frontier Facility, Norfund invested a 2 million EUR convertible loan in Wecyclers Nigeria Limited, a recycling company based in Lagos.
Outlook for the future
The UN Sustainable Development Goals (SDGs) and the climate ambitions set out in the Paris agreement provide important guidelines for development going forward, also for Norfund. The funding gap to reach the SGDs was formidable in developing countries already before the COVID pandemic and the Russian invasion of Ukraine. The annual investment gap has now increased from 2.5 billion USD to 4 billion USD in emerging markets, equal to 2.5 Norwegian oil funds.
Global growth outlooks are better in 2024 than in 2023, with inflation falling faster than expected in many regions. Still, predicted global growth for 2024 and 2025, at 3.1% and 3.2% respectively, is lower than the historical average of 3.8% for the period 2000-2019. There are, however, significant variations between countries. India, a key market for the Climate Investment Fund, is expected to maintain strong growth of 6.5% in both 2024 and 2025. Sub-Saharan Africa is expected to increase growth from 3.3% in 2023 to 3.8% in 2024, though this still lags behind the region’s population growth. The growth figures for Africa are burdened by sluggish growth in South Africa.
In 2024, half the world’s population lives in countries where elections are taking place. The Economist has termed 2024 a “giant test of nerves for democracy.” There are concerns about the global decline of democracy and an increase in election interference, enabled by new technologies. Several of Norfund’s core countries, including South Africa, Indonesia, India, Bangladesh, and Senegal (where the election has been cancelled), will be going to the polls this year. Norfund will remain a long-term, patient investor, but we must also prepare for turbulent times, both politically and economically.
The situation creates new challenges for companies in Norfund’s portfolio, but also shows the need for a patient and counter-cyclical investor like us. When capital flows out of a developing country, Norfund’s role becomes even more important. High unemployment rates in many markets require viable and profitable companies that can create jobs, and a robust finance sector that can finance them. These jobs must also be created within frameworks that nature and climate can thrive in.
Even under difficult conditions, Norfund has many investment opportunities for both mandates. At the close of 2024, we estimate that our committed portfolio will be around 35.5 billion NOK for the Development Mandate and 5.3 billion NOK for the Climate Mandate. However, these numbers depend on market conditions and continued pipeline development. 2023 was the first full year that Norfund managed the Climate Investment Fund. Our work now spans two mandates – development and climate: “Norfund invests to create jobs, improve lives and support the transition to net zero.” These mandates are distinct yet strengthen each other. By clearly delivering on both our development and climate mandates, as well as understanding the interlinkages between the two, we have a strong foundation for continued growth in the next strategy period. Norfund is in position to keep its level of investment high in the years ahead, but maintaining the investment level is contingent on continued annual injections of capital from the Norwegian government for both the development and the climate mandate.
Norfund cannot succeed alone. We find strength through collaboration with our partners: portfolio companies, co-investors, our owner, and other stakeholders. We are grateful for the trust they have put in us in 2023 and will do our utmost to deliver in 2024.
The board views Norfund as well-prepared to deliver on the strategy and goals that have been set. We thank the management and employees at Norfund for their important work during a challenging year. Diversity and a strong presence in our regions position us well for the years to come. Norfund will continue to make an important contribution to the success of an ambitious development and climate agenda and contribute to creating jobs, improving lives, and supporting the transition to net zero in the developing countries of the world.
Oslo, 15 May 2024
Olaug J. Svarva
Chair
Pablo Alberto Barrera Lopez
Martin Skancke
Vidar Helgesen
Vegard Benterud
Brit Rugland
Jarle Roth
Åslaug Haga
Karoline Teien Blystad