CDC's New Toolkit on ESG for Fund Managers

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Marie Rosencrantz, Senior Advisor, ESG and Monitoring & Evaluations - CDC Group plc - UK

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CDC's New Toolkit on ESG for Fund Managers

  1. 1. Marie Rosencrantz Senior Advisor, ESG and Monitoring & Evaluation, CDC Founder, Rosencrantz & Co CDC’s Toolkit on ESG for Fund Managers
  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 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 new Investment Code on ESG became effective in 2009. The new Toolkit provides help to CDC’s 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 updated 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>CDC Toolkit on ESG for Fund Managers
  4. 4. The business case for ESG features prominently in CDC’s new Toolkit on ESG for fund managers through practical guidance and case examples <ul><ul><li>There are numerous examples where sound ESG management is a key business success factor </li></ul></ul>ESG factors – Focus on improvements during the investment period Environment Social matters Environmental process & standards Environmental products / services Labour & working conditions Health & safety standards Other social matters Business integrity Good 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 <ul><ul><li>Strong business case </li></ul></ul><ul><ul><li>Business case </li></ul></ul>
  5. 5. <ul><li>The founders of Arch PharmaLabs, in which CDC’s capital is invested through the fund manager ICICI Ventures, started their company by purchasing a production plant in Hyderabad with a turnover of $2m in 1999. </li></ul><ul><li>Arch now has 11 production plants with total combined turnover of $185m and employs over 2,300 people. </li></ul><ul><li>Production standards have been improved towards the highest international standards. </li></ul><ul><ul><li>All 11 plants have WHO GMP certification. </li></ul></ul><ul><ul><li>2 factories are USFDA certified and 3 others expect to qualify shortly. </li></ul></ul><ul><li>Whilst bringing production standards up to USFDA level adds significantly to production costs, Arch considers this investment to be a more than justifiable expense as it is now able to bid for global pharmaceutical contracts. </li></ul><ul><li>Through its high standards, Arch has become the generic drug producer of choice for a number of global pharmaceutical companies, including Pfizer, Glaxo SmithKline, Sigma Tau and Elan. </li></ul>Case study 1: Arch PharmaLabs, India International business expansion from improved production standards
  6. 6. <ul><li>Outsourcing Services Limited (OSL) is a security outsourcing company that supplies security guards for corporate security services in Nigeria. </li></ul><ul><li>CDC’s fund manager African Capital Alliance (ACA) acquired a 40% stake in OSL in 1999. Given the difficult security situation in Nigeria, this was obviously a high-risk investment. </li></ul><ul><li>ACA was instrumental to institute numerous improvements for OSL’s employees. OSL’s security guards are better trained and better paid than guards at competitor firms. </li></ul><ul><li>. </li></ul><ul><li>With higher standards for their guards, OSL was able to charge a premium from its corporate clients and became the leading firm in the outsourced security services industry in Nigeria. </li></ul><ul><li>The international firm G4S bought ACA’s stake in OSL for $10m in 2009. This sale realised an IRR of 58% over 10 years - 44 times invested capital - one of the most successful exits to date from CDC’s fund-of-fund’s portfolio. </li></ul>Case study 2: OSL, Nigeria Start-up security company improved standards and was sold at record price
  7. 7. CDC’s Toolkit on ESG for fund managers contains 13 Tools <ul><ul><li>Tools: </li></ul></ul><ul><ul><li>ESG policies and guidelines </li></ul></ul><ul><ul><li>ESG management systems for fund managers </li></ul></ul><ul><ul><li>Considerations for the fund manager’s internal organization </li></ul></ul><ul><ul><li>Governance: business integrity and good corporate governance </li></ul></ul><ul><ul><li>Rating ESG risks </li></ul></ul><ul><ul><li>Key ESG due diligence questions </li></ul></ul><ul><ul><li>Assessing ESG management systems of investee companies </li></ul></ul><ul><ul><li>Investment paper and action plan for ESG improvements </li></ul></ul><ul><ul><li>ESG clauses for investment agreements </li></ul></ul><ul><ul><li>Monitoring and evaluations </li></ul></ul><ul><ul><li>ESG reporting to the fund’s investors </li></ul></ul><ul><ul><li>Information for the public: annual reports & websites </li></ul></ul><ul><ul><li>ESG considerations for the exit </li></ul></ul>CDC Toolkit on ESG for Fund Managers Adding value through effective environmental, social and governance (ESG) management
  8. 8. Example of a Tool – Guidance on ESG risk ratings for investee companies to help fund managers identify and manage risks Risk category Description of category Examples Category A / High Risk Significant adverse environmental and / or social impacts that are diverse, irreversible or unprecedented. Large dams and reservoirs Large scale agro-industries Large scale forestry Oil and gas developments Mining operations Hazardous waste disposal Category B / Medium Risk Potential adverse environmental and / or social impacts that are less severe than those of Category A. Mitigating measures can be designed more readily Small scale agro-industries General manufacturing Textile plants Telecommunications Food and beverages Water supply and sanitation Aqua-culture and mari-culture Category C / Low Risk Minimal or no adverse environmental and / or social impacts Advisory assignments Mortgage securitisation Life insurance Media IT
  9. 9. The Toolkit has 8 Appendices with more specific guidance on selected ESG matters <ul><ul><li>Appendices: </li></ul></ul><ul><ul><li>ESG risks & opportunities – industry sector examples </li></ul></ul><ul><ul><li>ESG management systems for different types of funds: SME, debt, micro-finance </li></ul></ul><ul><ul><li>International ESG reference standards and conventions </li></ul></ul><ul><ul><li>Investments from different development finance institutions – comparing standards, procedures & other useful tools </li></ul></ul><ul><ul><li>Reporting templates and example of an annual ESG report </li></ul></ul><ul><ul><li>The business case: examples of ESG success stories & lessons learned </li></ul></ul><ul><ul><li>Climate change considerations </li></ul></ul><ul><ul><li>Gender considerations – best practices for investors & businesses </li></ul></ul>CDC Toolkit on ESG for Fund Managers Adding value through effective environmental, social and governance (ESG) management
  10. 10. CDC’s fund managers can use the Toolkit to improve ESG management of investee companies throughout their investment processes (1/5) <ul><ul><li>What to do? </li></ul></ul><ul><ul><li>Formal agreement with CDC to commit to the Investment Code on ESG – by CDC’s standard Side Letter or equivalent </li></ul></ul><ul><ul><li>Investment strategy in line with CDC’s Exclusion List </li></ul></ul><ul><ul><li>Awareness of ESG risks and opportunities and how portfolio companies should address these, e.g., if the investment strategy includes high-risk sectors like oil and gas, mining, forestry, large scale agro-business, etc. </li></ul></ul><ul><ul><li>Awareness of country / regional ESG risks and opportunities, e.g., countries with weak employment legislation / enforcement </li></ul></ul>Fund raising – CDC investment Due diligence Investment Investment management Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 1; Appendix 3 & 4 </li></ul></ul><ul><ul><li>Tool 1 & 2; Appendix 1, 2, 3 & 4 </li></ul></ul><ul><ul><li>Tool 3, 4 & 5; Appendix 1, 2, 3, 4, 6, 7 & 8 </li></ul></ul><ul><ul><li>Tool 3, 4 & 5; Appendix 3, 7 & 8 </li></ul></ul>
  11. 11. <ul><li>What to do? </li></ul><ul><li>Assess new investments on ESG matters: </li></ul><ul><ul><li>sector risks </li></ul></ul><ul><ul><li>issues or opportunities to add value </li></ul></ul><ul><ul><li>quality of investee company ESG management systems </li></ul></ul><ul><li>Give new investments a risk rating on ESG matters to determine the appropriate level of management and monitoring </li></ul>Fund raising – CDC investment Due diligence Investment Investment management Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 5, 6 & 7; Appendix 1, 2, 3, 4, 6, 7 & 8 </li></ul></ul><ul><ul><li>Tool 5; Appendix 1, 2, 3, 4, 7 & 8 </li></ul></ul>CDC’s fund managers can use the Toolkit to improve ESG management of investee companies throughout their investment processes (2/5)
  12. 12. <ul><li>What to do? </li></ul><ul><li>Assist portfolio companies to develop action plans to address potential ESG issues identified during due diligence, with appropriate targets and timetable for improvements </li></ul><ul><li>Procure investment undertaking from portfolio companies in line with CDC’s Investment Code on ESG where GPs have effective control or significant influence </li></ul>Fund raising – CDC investment Due diligence Investment Investment management Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 8; Appendix 1, 2, 3, 4, 6, 7 & 8 </li></ul></ul><ul><ul><li>Tool 9; Appendix 3 & 4 </li></ul></ul>CDC’s fund managers can use the Toolkit to improve ESG management of investee companies throughout their investment processes (3/5)
  13. 13. <ul><li>What to do? </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 </li></ul><ul><li>If ESG issues would arise, assist portfolio companies to address them in a timely manner </li></ul><ul><li>Report annually to CDC and other investors </li></ul><ul><li>Monitor and record any serious ESG incidents in portfolio companies and inform CDC </li></ul><ul><li>Report to the general public </li></ul>Fund raising – CDC investment Due diligence Investment Investment management Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 1, 7, 8 & 10; Appendix 1, 2, 3, 4, 6, 7 & 8 </li></ul></ul><ul><ul><li>Tool 8, 10 & 11; Appendix 6 </li></ul></ul><ul><ul><li>Tool 10; Appendix 1, 2, 3 & 6 </li></ul></ul><ul><ul><li>Tool 11; Appendix 4 & 5 </li></ul></ul><ul><ul><li>Tool 11; Appendix 5 </li></ul></ul><ul><ul><li>Tool 12 </li></ul></ul>CDC’s fund managers can use the Toolkit to improve ESG management of investee companies throughout their investment processes (4/5)
  14. 14. <ul><li>What to do? </li></ul><ul><li>Consider ESG matters at divestment: </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>Fund raising – CDC investment Due diligence Investment Investment management Exit Investment <ul><ul><li>Toolkit reference: </li></ul></ul><ul><ul><li>Tool 13; Appendix 1, 2, 3, 6, 7 & 8 </li></ul></ul>CDC’s fund managers can use the Toolkit to improve ESG management of investee companies throughout their investment processes (5/5)
  15. 15. The Toolkit is a resource for CDC, fund managers, other development finance institutions and commercial investors <ul><ul><li>CDC will distribute a printed version of the Toolkit to its fund managers </li></ul></ul><ul><ul><li>An electronic version of the Toolkit will be 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 will organize training sessions for its fund managers based on the Toolkit during Q4 2010 </li></ul></ul>Please let us know if you would like to receive printed versions of the Toolkit or collaborate with CDC or Rosencrantz & Co in training for fund managers CDC Toolkit on ESG for Fund Managers Adding value through effective environmental, social and governance (ESG) management
  16. 16. <ul><li>Deacons is a Kenyan retailer which sells clothing, footwear, accessories and home-wares. </li></ul><ul><li>Assisted by an investment from CDC’s fund manager Aureos, Deacons has expanded to now have 19 stores across Kenya, Tanzania and Uganda. </li></ul><ul><li>The company has pioneered an innovative marketing practice by partnering with a breast cancer awareness NGO. </li></ul><ul><li>By introducing breast cancer screening alongside the female underwear departments of its retail stores, Deacons raised awareness of breast cancer, and achieved a huge surge in its sales of brassieres. </li></ul><ul><li>Deacons now has 80% of the Kenyan formal market for female underwear. </li></ul>Case study 3: Deacons, Kenya Growing retail in East Africa in partnership with an NGO

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