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Sustainable investments in emerging markets: CDC’s new Toolkit on ESG for fund managers November 2010
CDC is the UK development finance institution with investments through funds focused on the frontier emerging markets <ul>...
CDC’s Investment Code sets out investment standards on ESG. The new Toolkit provides practical help to fund managers on ES...
The business case for ESG features prominently in the Toolkit with practical guidance and case studies for fund managers M...
<ul><ul><li>Relevant to all stages of investment cycle: </li></ul></ul><ul><ul><li>Tool 1 Adding value through ESG improve...
Example of a Tool (4): Questions to assess a fund manager’s ESG management systems    Yes No Comments Yes No Comments Yes ...
The Toolkit has 10 Appendices with more specific guidance on selected ESG matters <ul><ul><ul><ul><li>Appendices: </li></u...
Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment process...
Example of a Tool (1): Adding value through ESG improvements   Identifying opportunities where ESG improvements can drive ...
Example of a Tool (1): Adding value through ESG improvement Case example: Shelys Pharmaceuticals, Tanzania <ul><li>Shelys ...
Example of a Tool (1): Adding value through ESG improvements The ESG business case matrix as applied to Shelys Pharmaceuti...
Example of a Tool (5): Rating ESG risks Rating risks: the Environment Risk category Description of category Examples High ...
Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment process...
Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment process...
Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment process...
Example of a Tool (9): Investment paper and action plans for ESG improvements Identified issues and mitigating measures sh...
Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment process...
Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment process...
<ul><ul><li>A printed version of the Toolkit has been distributed to CDC’s fund managers </li></ul></ul><ul><ul><li>An ele...
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Marie rosencrantz

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Founder - Rosencrantz & Co. - UK
Investments in Frontier Emerging Markets

Published in: Economy & Finance
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  • Frame it: First four at all stages of an investment lifecycle remaining follow chronological order
  • What is an ESG management system? A way of going from ad hoc to consistent , continuous management Embedding key concerns into the organisational structure and day tp day processes Differs somewhat between fund managers and portfolio companies but large similarities as well No one size fits all – depending on size of portfolio companies in a fund, industries these are in and related risk levels, as well as geographic specific risks Why is it important? ESG issues and opportunities happen every day – need constant monitoring and management Just like any other business concern it needs consistency, continuous improvements and performance management What could different key components of a management system look like? Go through above key areas and line items one by one Illustrate with CDC’s own ESG management system Illustrate also with fund manager examples from CDC’s portfolio Do exercise!
  • Gar endast igenom App 1 o 2 dfor due diligence, men ej resten Oversattning kommer Kan diskutera ngt indivudellt vids behov imorgon vio dbehov mer workshops njasta ar o pa andra stallemn globalt Climate change studien kan aladdas ner fr webben
  • Not always but often connection ESG and business value This is a systematic way of assessing this relationship Use anytime you look at a company to realize the full value and opportunities
  • To produce and sell pharmaceuticals different countries have different standards WHO has established a body of expert reps from each member country and agree on good manufacturing practices for food and Pharma production, the so-called dGMP standard On scale form 1 to 10 GMP could be considered a four, while the US and EU have even higher/stricter standards determined by the US FDA and the EU GNP many emerging markets have adopted WHO GMP but not all – Tanzania does not have such high standards, which is why Shelys initially just focused on the domestic, Tanzanian market Obtaining WHO GMP standards was critical to get above Tanzanian standards to Kenyan standards and thus to export there it was also critical for for Aspen/the buyer to even consider investing in Shelys, as they were looking for a company capable of exporting to a large number ofc countries with sometimes higher standards Corporate Governance: Aureos/the GP was also instrumental in improving good CG by recruiting a new CO and disclosing financial information, which is another important and sometimes critical factor to entice/attract investors and reduce risks The above does not apply to all companies and industries and situations, but to many, and influences to differing degrees the revenue and exports
  • This is very important to get right: Accuracy of cost estimates impacts valuation and returns Possible cost increases can be a source of dispute/complications later and on whose budget these should land
  • Transcript of "Marie rosencrantz"

    1. 1. Sustainable investments in emerging markets: CDC’s new Toolkit on ESG for fund managers November 2010
    2. 2. CDC is the UK development finance institution with investments through funds focused on the frontier emerging markets <ul><ul><li>is owned by the UK government through the Department for International Development (DFID) </li></ul></ul><ul><ul><li>invests through funds in promising businesses in frontier emerging markets: </li></ul></ul><ul><ul><ul><li>75% low income countries </li></ul></ul></ul><ul><ul><ul><li>50% sub-Saharan Africa </li></ul></ul></ul><ul><ul><li>invests mostly through private equity funds but also in microfinance and debt funds </li></ul></ul><ul><ul><li>has £1,411m in portfolio value </li></ul></ul><ul><ul><ul><li>65 fund managers in 37 countries </li></ul></ul></ul><ul><ul><ul><li>134 funds </li></ul></ul></ul><ul><ul><ul><li>794 portfolio companies in 71 countries </li></ul></ul></ul><ul><ul><li>£207m total return after tax in 2009 </li></ul></ul>CDC’s investments by year end 2009: 794 portfolio companies in 71 countries CDC’s 65 fund managers have local offices in 37 emerging markets countries More than 25 investments 15-24 investments 6-14 investments 1-5 investments More than 10 offices 5-10 offices 2-4 offices One office
    3. 3. CDC’s Investment Code sets out investment standards on ESG. The new Toolkit provides practical help to fund managers on ESG for their investments <ul><ul><li>CDC’s Investment Code on ESG: </li></ul></ul><ul><ul><li>The Investment Code defines CDC’s principles, objectives, policies and management systems for sustainable and responsible investment with respect to the environment, social matters and governance (ESG) </li></ul></ul><ul><ul><li>The Investment Code also contains CDC’s Exclusion List for businesses and activities where CDC’s capital will not be invested </li></ul></ul><ul><ul><li>CDC’s Toolkit on ESG for fund managers: </li></ul></ul><ul><ul><li>Provides practical guidance for fund managers on how to implement sound ESG management throughout their investment processes </li></ul></ul><ul><ul><li>Gives specific guidance for investments in different industry sectors and for different types of funds </li></ul></ul><ul><ul><li>Provides short summaries of the relevant international standards and conventions for ESG, including the IFC Performance Standards, ILO Conventions, and business integrity and good corporate governance standards </li></ul></ul>
    4. 4. The business case for ESG features prominently in the Toolkit with practical guidance and case studies for fund managers MARKET ACCESS CAPITAL ACCESS LICENCE TO OPERATE BRAND ENHANCEMENT REVENUE GROWTH COST SAVINGS RISK MANAGEMENT INNOVATION PRODUCTIVITY BUSINESS OPPORTUNTIES Sound ESG analysis and management can contribute to many of the most important value drivers for a business
    5. 5. <ul><ul><li>Relevant to all stages of investment cycle: </li></ul></ul><ul><ul><li>Tool 1 Adding value through ESG improvements </li></ul></ul><ul><ul><li>Tool 2 ESG policies and guidelines </li></ul></ul><ul><ul><li>Tool 3 ESG considerations at each stage of the investment process </li></ul></ul><ul><ul><li>Tool 4 Questions to assess a fund manager’s ESG management systems </li></ul></ul><ul><ul><li>Relevant to specific parts of the investment process: </li></ul></ul><ul><ul><li>Tool 5 Rating ESG risks </li></ul></ul><ul><ul><li>Tool 6 ESG due diligence </li></ul></ul><ul><ul><li>Tool 7 Environmental and social impact assessments </li></ul></ul><ul><ul><li>Tool 8 Questions to assess a company’s ESG management systems </li></ul></ul><ul><ul><li>Tool 9 Investment paper and action plan for ESG improvements </li></ul></ul><ul><ul><li>Tool 10 Investment agreement </li></ul></ul><ul><ul><li>Tool 11 Investment monitoring </li></ul></ul><ul><ul><li>Tool 12 ESG reporting </li></ul></ul><ul><ul><li>Tool 13 Information for the public: annual reports and websites </li></ul></ul><ul><ul><li>Tool 14 ESG considerations at exit </li></ul></ul>CDC’s Toolkit on ESG for fund managers contains 14 Tools
    6. 6. Example of a Tool (4): Questions to assess a fund manager’s ESG management systems Yes No Comments Yes No Comments Yes No Comments Yes No Comments Policy and processes 1. Policy: Are there formal policies and systems to manage ESG?   2. Identifying opportunities: Does the fund manager proactively identify opportunities for ESG improvements for its investments?   3. Risks: Are investments formally assessed for risk and given an appropriate level of monitoring based upon this risk rating?   4. Critical risks: Can ESG considerations act as a block on a potential investment opportunity?   5. Action plans: Are formal action plans drawn up to address ESG deficiencies?   6. Monitoring: Are there any processes in place to manage/ monitor ESG risks and areas?   Roles and responsibilities 7. ESG resources: Does the fund manager have a designated ESG professional?   8. Top level responsibility: Has ESG responsibility been established at all levels including the fund’s Investment Committee and governing body?   9. Specialists: Are specialist consultants/ external technical experts used to assess and monitor high risk investments? If so when and who?   10. Training: Does the fund manager provide ESG training for all relevant staff?   ESG performance management 11. Performance indicators: Are there key performance indicators in place to measure and track ESG performance at portfolio companies?   12. Serious incidents: Is there an established protocol for how to follow up serious incidents involving portfolio companies   Reporting & Stakeholder management 13. Communication lines: Are there defined lines of communication in place to report on ESG matters, including any serious incidents, to the fund manager’s Investment Committee and governing body?   14. Reporting to the fund’s investors: Are ESG matters reported on to the fund’s investors at least annually and are any serious incidents reported immediately?  
    7. 7. The Toolkit has 10 Appendices with more specific guidance on selected ESG matters <ul><ul><ul><ul><li>Appendices: </li></ul></ul></ul></ul><ul><ul><ul><ul><li>ESG due diligence questions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sector-specific risks and opportunities for improvements </li></ul></ul></ul></ul><ul><ul><ul><ul><li>ESG risks in different regions and selected countries </li></ul></ul></ul></ul><ul><ul><ul><ul><li>ESG management for different types of funds </li></ul></ul></ul></ul><ul><ul><ul><ul><li>International ESG reference standards and conventions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>CDC’s monitoring and evaluation system </li></ul></ul></ul></ul><ul><ul><ul><ul><li>CDC’s reporting templates and an example of an annual ESG report </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Investments by different development finance institutions (DFIs): comparing standards and procedures </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Climate change considerations: risks and opportunities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Gender considerations: good practices for investors and businesses </li></ul></ul></ul></ul>
    8. 8. Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment processes (1/6) <ul><ul><li>What to do? </li></ul></ul><ul><ul><li>Assess opportunities to add value to potential investee companies from ESG perspectives </li></ul></ul><ul><ul><li>Assess whether a potential investment is in line with the fund’s exclusion list and ESG policies and guidelines. </li></ul></ul><ul><ul><li>Discuss the fund’s ESG polices with management of a potential investee company to clarify expectations </li></ul></ul><ul><ul><li>Rate ESG risks </li></ul></ul><ul><ul><li>Ensure awareness of sector specific as well as country / regional ESG risks and opportunities, e.g., countries with weak employment legislation / enforcement </li></ul></ul>Initial screening Due diligence Investment Investment monitoring Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 1 </li></ul></ul><ul><ul><li>Tool 2; Appendix 5 </li></ul></ul><ul><ul><li>Tool 2; Appendix 5 </li></ul></ul><ul><ul><li>Tool 5 </li></ul></ul><ul><ul><li>Appendix 2 & 3 </li></ul></ul>
    9. 9. Example of a Tool (1): Adding value through ESG improvements Identifying opportunities where ESG improvements can drive business success <ul><ul><li>There are numerous examples where sound ESG management is a key business success factor. </li></ul></ul><ul><ul><li>Fund managers should consider how each ESG factor can drive or contribute to different business success factors as per this matrix. </li></ul></ul>Source: Developing Value: The business case for sustainability in emerging markets, Sustainability , IFC and Ethos Institute, 2004. Adapted by CDC and Rosencrantz & Co Environment Social matters Environmental standards & processes Environmental products / services Labour & working conditions Health & safety Other social matters Business integrity Corporate governance Revenue growth and market access Cost savings and productivity Access to capital Risk management and license to operate Human capital Brand value and reputation Business success factors Governance ESG factors: improvements during the investment period
    10. 10. Example of a Tool (1): Adding value through ESG improvement Case example: Shelys Pharmaceuticals, Tanzania <ul><li>Shelys is a Tanzanian pharmaceutical manufacturer, specialising in over-the-counter products including generic anti-malarial drugs. </li></ul><ul><li>A five year investment by CDC’s fund manager Aureos was successfully exited in 2008. </li></ul><ul><li>The interest from the South African trade buyer Aspen Pharmacare was triggered by the upgrades made to Shelys’ production standards during Aureos’ investment period to comply with WHO GMP, despite no such requirements in Tanzania. </li></ul><ul><li>Improving production standards towards WHO GMP has provided access for Shelys to markets in eight other countries across Central and Eastern Africa. </li></ul><ul><li>The improvements in environmental discharge standards, reduced dust and particle emissions and drug safety scrutiny, along with strengthened corporate governance, were key to Shelys’ business expansion and Aureos’ successful exit. </li></ul>
    11. 11. Example of a Tool (1): Adding value through ESG improvements The ESG business case matrix as applied to Shelys Pharmaceuticals Environment Social matters Environmental standards & processes Environmental products / services Labour & working conditions Health & safety Other social matters Business integrity Corporate governance Revenue growth and market access Cost savings and productivity Access to capital Risk management and license to operate Human capital Brand value and reputation Business success factors Governance ESG factors: improvements during the investment period Source: Developing Value: The business case for sustainability in emerging markets, Sustainability , IFC and Ethos Institute, 2004. Adapted by CDC and Rosencrantz & Co Business success driven by ESG improvements
    12. 12. Example of a Tool (5): Rating ESG risks Rating risks: the Environment Risk category Description of category Examples High A proposed investment is classified as Category A if it is likely to have significant adverse environmental impacts that are sensitive, diverse or unprecedented. <ul><li>Large dams and reservoirs </li></ul><ul><li>Forestry (large scale) </li></ul><ul><li>Agro-industries (large scale) </li></ul><ul><li>Industrial plants (large-scale) </li></ul><ul><li>Major new industrial estates </li></ul><ul><li>Extractive industries, including mining, major oil and gas developments and major pipelines </li></ul><ul><li>Large ferrous and non-ferrous metal operations; </li></ul><ul><li>Large port and harbour developments </li></ul><ul><li>Developments with large resettlement components </li></ul><ul><li>Large thermal and hydropower development </li></ul><ul><li>Projects that include the manufacture, use or disposal of environmentally significant quantities of pesticides or herbicides </li></ul><ul><li>Manufacture, transportation and use of hazardous and/or toxic materials </li></ul><ul><li>Domestic and hazardous waste disposal operations </li></ul>Medium A proposed investment is classified as Category B if its potential adverse impacts on environmentally important areas including wetlands, forests, grasslands and other natural habitats are less adverse than those of Category A investments but more adverse than Category C investments. These impacts are site-specific; few if any of them are irreversible and in most cases mitigating measures can be designed more readily than for Category A investments. <ul><li>Agro-industries (small scale) </li></ul><ul><li>Electrical transmission </li></ul><ul><li>Aquaculture </li></ul><ul><li>Renewable energy (except large hydroelectric power projects </li></ul><ul><li>Tourism (including hotel projects) </li></ul><ul><li>Rural water supply and sanitation </li></ul><ul><li>Rehabilitation, maintenance and modernisation projects (small scale) </li></ul><ul><li>Manufacture of construction materials </li></ul><ul><li>General manufacturing </li></ul><ul><li>Telecommunications </li></ul><ul><li>Greenfield projects in existing industrial estate </li></ul>Low A proposed investment is classified as Category C if it is likely to have minimal or no adverse environmental impacts. <ul><li>Advisory assignments </li></ul><ul><li>Media and information technology </li></ul><ul><li>Life insurance companies </li></ul><ul><li>Securities underwriters and broker/dealers </li></ul><ul><li>Technical assistance </li></ul>
    13. 13. Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment processes (2/6) <ul><li>What to do? </li></ul><ul><li>Check compliance with all ESG requirements and regulations in the fund’s investment policy </li></ul><ul><li>Assess all relevant aspects of the new investments from the ESG perspectives: </li></ul><ul><ul><li>risks (sector, country, company specific) </li></ul></ul><ul><ul><li>issues </li></ul></ul><ul><ul><li>opportunities to add value </li></ul></ul><ul><li>If high risks: contract specialists to perform an environmental and social impact assessment </li></ul><ul><li>Assess quality of a potential investee company’s management systems </li></ul>Initial screening Due diligence Investment Investment monitoring Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 2, Appendix 5 & 8 </li></ul></ul><ul><ul><li>Tool 6; Appendix 1-3; 5; 9-10 </li></ul></ul><ul><ul><li>Tool 7 </li></ul></ul><ul><ul><li>Tool 8 </li></ul></ul>
    14. 14. Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment processes (3/6) Assess ESG opportunities & rate ESG risks Tool 5 Tool 1 1 3 Assessment of a company’s ESG management systems in relation to risk level Tool 8 2 Due diligence questions Tool 6 & Appendices 1-2
    15. 15. Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment processes (4/6) <ul><li>What to do? </li></ul><ul><li>Address key ESG matters in the investment paper. </li></ul><ul><li>Assist potential investee companies to develop action plans to address ESG issues identified during due diligence, with appropriate targets and timetable for improvements. </li></ul><ul><li>Procure formal investment undertaking from portfolio companies on ESG where fund managers have effective control or significant influence. </li></ul>Initial screening Due diligence Investment Investment monitoring Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 9 </li></ul></ul><ul><ul><li>Tool 9 </li></ul></ul><ul><ul><li>Tool 10 </li></ul></ul>
    16. 16. Example of a Tool (9): Investment paper and action plans for ESG improvements Identified issues and mitigating measures should be specified in an action plan to be agreed between an investor and the company’s management Area of ESG concern as identified through due diligence and management systems questions Level of ESG risk (high, medium, low) Action required By when Responsibility (company staff, management and board member) Cost (US$) X Y Z
    17. 17. Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment processes (5/6) <ul><li>What to do? </li></ul><ul><li>Check on-going ESG compliance </li></ul><ul><li>Encourage managers of portfolio companies to: </li></ul><ul><ul><li>work towards continuous improvements on ESG </li></ul></ul><ul><ul><li>adopt and implement sound ESG policies </li></ul></ul><ul><li>Monitor portfolio companies’ performance on ESG and progress towards action plans. If ESG issues arise, assist portfolio companies to address them in a timely manner </li></ul><ul><li>Report annually to investors </li></ul><ul><li>Monitor and record any serious ESG incidents in portfolio companies and inform investors </li></ul><ul><li>External communication to the general public through annual reports and websites </li></ul>Initial screening Due diligence Investment Investment monitoring Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 2 ,11 </li></ul></ul><ul><ul><li>Tool 1,11; Appendix 5 </li></ul></ul><ul><ul><li>Tool 11 </li></ul></ul><ul><ul><li>Tool 12; Appendix 7 </li></ul></ul><ul><ul><li>Tool 12; Appendix 7 </li></ul></ul><ul><ul><li>Tool 13 </li></ul></ul>
    18. 18. Fund managers can use the Toolkit to effectively integrate ESG analysis and management throughout their investment processes (6/6) <ul><li>What to do? </li></ul><ul><li>Consider ESG matters at exit: </li></ul><ul><ul><li>any ESG issues with potential buyers? </li></ul></ul><ul><ul><li>will sound ESG practices continue under new owners? </li></ul></ul>Initial screening Due diligence Investment Investment monitoring Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 14; Appendix 1, 2 </li></ul></ul>
    19. 19. <ul><ul><li>A printed version of the Toolkit has been distributed to CDC’s fund managers </li></ul></ul><ul><ul><li>An electronic version of the Toolkit is accessible from: </li></ul></ul><ul><ul><ul><li>CDC’s website </li></ul></ul></ul><ul><ul><ul><li>www.cdcgroup.com </li></ul></ul></ul><ul><ul><ul><li>Rosencrantz & Co’s website </li></ul></ul></ul><ul><ul><ul><li>www.rosencrantzandco.com </li></ul></ul></ul><ul><ul><li>CDC and Rosencrantz & Co conducts workshops for CDC’s fund managers based on the Toolkit during Q4 2010 </li></ul></ul>The Toolkit is a resource for CDC, fund managers, other development finance institutions and commercial investors Please let us know if you would like to receive printed versions of the Toolkit or collaborate with CDC or Rosencrantz & Co in workshops or otherwise
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