TBLI in Emerging Markets: Insights on integrating ESG into private equity in challenging markets


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Sarita Bartlett, Investment Manager- Social, Environment and Governance, Norfund.

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TBLI in Emerging Markets: Insights on integrating ESG into private equity in challenging markets

  1. 1. TBLI in Emerging Markets: Insights on integrating ESG into private equity in challenging markets TBLI Conference, Amsterdam November 12, 2009 Sarita Bartlett Investment Manager- Social, Environment and Governance
  2. 2. Insights on integrating ESG into private equity in challenging markets <ul><li>Development Finance Institutions </li></ul><ul><li>An overview of Norfund </li></ul><ul><li>Environment, Social and Governance at Norfund </li></ul><ul><li>Norfund’s Active ownership </li></ul><ul><li>Technical Assistance in the area of Corporate Responsibility </li></ul><ul><li>Norfund’s Development Effects </li></ul><ul><li>Summary </li></ul>
  3. 3. <ul><li>Development Finance Institutions (DFIs): The 3rd pillar of development cooperation </li></ul><ul><ul><li>Economic growth, combined with equitable and sustainable global development </li></ul></ul><ul><ul><li>Development </li></ul></ul><ul><ul><li>& humanitarian </li></ul></ul><ul><ul><li>assistance </li></ul></ul><ul><ul><li>National DFIs </li></ul></ul><ul><ul><li>Multilateral </li></ul></ul><ul><ul><li>development banks </li></ul></ul><ul><ul><li>Bilateral & </li></ul></ul><ul><ul><li>multilateral (EC, UN) </li></ul></ul><ul><ul><li>Sector-specific </li></ul></ul><ul><ul><li>interventions </li></ul></ul><ul><ul><li>Public finance </li></ul></ul><ul><ul><li>Donor financing for projects and programs </li></ul></ul><ul><ul><li>Provide humanitarian </li></ul></ul><ul><ul><ul><li>aid for Disaster Risk, </li></ul></ul></ul><ul><ul><ul><li>Reduction and </li></ul></ul></ul><ul><ul><ul><li>Recovery </li></ul></ul></ul><ul><ul><li>Norfund, AWS OeEB, BIO SBI-BMI, CDC, COFIDES, DEG, Finnfund, IFU, FMO, MFD, Proparco, SOFID, SIFEM, SIMEST, Swedfund </li></ul></ul><ul><ul><li>Long-term financing to the private sector </li></ul></ul><ul><ul><li>Catalyze private sector investment and national expertise </li></ul></ul><ul><ul><li>Support SMEs to build width in the economy </li></ul></ul><ul><ul><li>Exclusively in developing countries with focus on Africa and other LDCs </li></ul></ul><ul><li>International DFIs, </li></ul><ul><li>(e.g., IDA, IBRD, </li></ul><ul><li>IFC, MIGA & regional </li></ul><ul><li>development banks) </li></ul><ul><li>Fewer and larger-scale </li></ul><ul><li>projects than national DFIs </li></ul><ul><li>Mainly guarantees and </li></ul><ul><li>loan-based </li></ul><ul><li>Global focus </li></ul><ul><li>Mostly concentrated on </li></ul><ul><li>governments and public </li></ul><ul><li>services </li></ul>National DFIs are additional and catalytic. However, they are a diverse group of funds with different ownership structures, sizes, strategies, mandates, and expertise.
  4. 4. 2. Norfund and its mandate <ul><li>Invest in the poorest countries in the world , where there are </li></ul><ul><ul><li>weak institutions and </li></ul></ul><ul><ul><li>Norfund and its partners face endemic problems with corruption </li></ul></ul><ul><li>Implement high ESG standards in the projects in which it invests </li></ul><ul><li>Invest on commercial terms, but be additional to private investors. It is willing to contract more risks and spend more resources on developing projects (including the projects’ CSR aspects) </li></ul><ul><li>Always invest with other investors, generally between 20 and 30 percent; Norfund will never be a majority owner. </li></ul>Poverty reduction through investment in profitable enterprises ” Sustainable improvements in developing countries depend, to a large degree, on the ability to create profitable enterprises and employment” Erik Solheim, Minister of the Environment and International Development Norfund does not look for perfect projects or ideal partners, but rather it seeks to secure projects in which its money can make a difference! Norfund will: The Norwegian Investment Fund for Developing Countries – Norfund – was created by the Norwegian Parliament in 1997. It is a hybrid state-owned company established by law with limited liability, owned on behalf of the state by the Ministry of Foreign Affairs. As of December 31, 2008, it had NOK 5.3 billion (€ 632.5 million) in assets under management.
  5. 5. Geography: Four regions with emphasis on Africa and other LDCs Sectors: Renewable Energy, SMEs (directly and indirectly via funds, and Finance institutions Direct Investments: SMEs together with Norwegian/international partners Technical Assistance: Project development, Development support and enhancement, and CSR 2. Norfund: Expertise – Capital – Value Add Norfund’s regional offices <ul><ul><li>Johannesburg, </li></ul></ul><ul><ul><li>South Africa </li></ul></ul>San José, Costa Rica <ul><ul><li>Nairobi, Kenya </li></ul></ul>SN Power Direct investments, funds and financial institutions
  6. 6. 2. Norfund: Geographic distribution, Investment Areas and Results Internal Rates of Return (2002-2008) and since inception Funds Financial Institutions Renewable Energy Industrial Partnerships <ul><ul><li>2002 2003 2004 2005 2006 2007 2008 Since inception </li></ul></ul>Total -4% 7% -1% 4% 24% 17% 21% 13% Loan 8% Equity 92% Funds 26% FI 17% Industrial Partnerships 8% Renewable Energy 49% LDCs 38% Low income countries 8% Lower income countries 42% Global & middle income countries 12% - 5% 19% 0% -9% - 15% 4% 17% -22% - 4% 18% 1% -28% 1% 9% 44% -19% 17% 10% -3% 2% 32% 27% 14% 16% 4% 9% 25% 10% 7% 11% 18% -5%
  7. 7. Requiring high ESG Standards Supporting Norwegian firms Not creating distortions in the local business community Conducts activities in accordance with the fundamental principals of Norwegian development policy, such as: Balance between : 2. Norfund: Challenges Being a professional actor who: Operates in the world’s most challenging markets Is independent Is profitable
  8. 8. <ul><li>Why </li></ul><ul><li>Establish new, high risk projects with large development effects in areas in which funds do not exist </li></ul><ul><li>Attract competence and technology to LDCs. </li></ul><ul><li>How </li></ul><ul><li>Mobilize the Norwegian business community </li></ul><ul><li>Be an active, long-term owner </li></ul><ul><li>Why </li></ul><ul><li>Access to electricity is a precondition for economic growth </li></ul><ul><li>How </li></ul><ul><li>Invest in renewable energy projects </li></ul><ul><li>Mobilize Norwegian capital and expertise in renewable energy </li></ul><ul><li>Why </li></ul><ul><li>To create financial services to the smallest entrepreneurs </li></ul><ul><li>How </li></ul><ul><li>Invest in SME Banks, Funds, and Microfinance investments </li></ul><ul><li>Increase competition and range of local supply </li></ul><ul><li>Partnerships (e.g., MNI) </li></ul>2. Norfund: Four Investment Areas Financial Institutions Funds Renewable Energy Industrial Partnerships <ul><li>Why </li></ul><ul><li>Storage of risk capital </li></ul><ul><li>Important for building the formal economy </li></ul><ul><li>Strengthen the local capital market </li></ul><ul><li>How </li></ul><ul><li>Invest through existing PE fund managers </li></ul><ul><li>Establish new fund managers in countries and/or segments where funds do not exist </li></ul>Build financial infrastructure Strengthen SMEs Private equity where there are large development effects Build energy infrastructure
  9. 9. 3. ESG is an integrated part of Norfund’s operations: ESG Goals <ul><li>Ensure Norfund’s, and its owner’s values </li></ul><ul><li>Identify, manage, and minimize ESG-related risks </li></ul><ul><li>Value creation </li></ul><ul><li>Strengthen development effects </li></ul>
  10. 10. Investments: Phases and focus Identify good projects Achieve good investment terms Achieve good results and create value Realize profits <ul><li>Strategic goals </li></ul><ul><li>Competence in </li></ul><ul><li>- Investments </li></ul><ul><li>- Countries </li></ul><ul><li>- Sectors </li></ul><ul><li>- ESG </li></ul><ul><li>Project development </li></ul><ul><li>Strengthening of </li></ul><ul><li>development impacts </li></ul><ul><li>Project/Country analysis </li></ul><ul><li>Evaluating of partner(s) </li></ul><ul><li>and clarification of </li></ul><ul><li>mutual expectations. </li></ul><ul><li>Satisfactory price </li></ul><ul><li>Secure strategic interests </li></ul><ul><li>Protect downside </li></ul><ul><li>Development impacts </li></ul><ul><li>Due diligence </li></ul><ul><li>Contract/ Terms </li></ul><ul><li>Exit strategy </li></ul><ul><li>Active ownership </li></ul><ul><li>Correct strategic choices </li></ul><ul><li>Risk management </li></ul><ul><li>Internal control (including </li></ul><ul><li>monitoring and reporting) </li></ul><ul><li>Good management </li></ul><ul><li>Growth </li></ul><ul><li>Profitability </li></ul><ul><li>Sustainability </li></ul><ul><li>Identification of potential </li></ul><ul><li>buyers </li></ul><ul><li>Illuminate value </li></ul><ul><li>Identification of potential buyers </li></ul><ul><li>Develop ownership structure </li></ul><ul><li>and liquidity </li></ul><ul><li>Exchange listing or trade sale </li></ul><ul><li>Exit management </li></ul><ul><li>Timing </li></ul>3. ESG is an integrated part of Norfund’s operations: The integration of ESG into Norfund’s investment processes ESG is an integrated part of Norfund’s investment processes- from mapping and evaluation through to the exit phase Map and Evaluate Invest Own Exit
  11. 11. 3. Norfund’s ESG policy and controls Norfund’s Business Integrity Policy Norfund’s Exclusion list Initial conversations w/ project leader, partner & project on ESG issues and expectations Exploration of development possibilities Due diligence (including. SEG) Review of development possibilities <ul><li>Contract and Terms </li></ul><ul><li>Exclusion list </li></ul><ul><li>E&S Policy </li></ul><ul><li>HES Guidelines </li></ul><ul><li>Corp. governance </li></ul><ul><li>guidelines </li></ul>Active ownership Use of TA Funds, if necessary Norfund’s Code of Conduct Norfund’s Corporate Governance Policy ESG input on the Investment Committee Paper Norfund Jointly together w/partners and potential investment object Exclusion list (fund & fi) Corporate governance policy and guidelines HES Guidelines E&S/HES Responsible resource E&S/HES Management system On-going reporting on fatalities (and other serious, unexpected incidents (not in loans, fi and funds) Annual reporting on ESG/HES and development impact Environmental & social policy Project/Sub-Project Map & Evaluate Invest Ownership Exit Measurement and reporting of development indicators/impact Input on ESG-related risk levels (every quarter) Input on annual reviews for different investment areas
  12. 12. Focus Method/ Implementation Goal Benefits Disadvantages Why does Norfund use active ownership as a tool to promote better ESG-related practices? 4. Norfund’s active ownership: Norfund Other factors include: Asset Class, Legal framework, Ownership (%), Other Investors, Governance Role, and Attitudes, Relationships, etc. Opportunities and constraints to active ownership s Active Ownership <ul><li>Focus on compliance with contracts </li></ul><ul><li>and terms, as well as value creation </li></ul><ul><li>Participation in boards and on other steering committees </li></ul><ul><li>Engagement with management </li></ul><ul><li>Use of TA Funds </li></ul><ul><li>Compliance reports </li></ul><ul><li>Audits </li></ul><ul><li>Control </li></ul><ul><li>Risk management </li></ul><ul><li>Value creation </li></ul><ul><li>More comprehensive control </li></ul><ul><li>Better risk management </li></ul><ul><li>Potential to create value </li></ul><ul><li>Good relationship with company </li></ul><ul><li>Higher costs </li></ul><ul><li>Can be limited by contracts and terms </li></ul><ul><li>Can be perceived as meddling investor </li></ul>Direct Investments Funds & FI Sub-projects (Fund’s Investee Companies) DI’s large suppliers FI’s large clients DI’s small suppliers FI’s small clients
  13. 13. 5. Technical Assistance in the area of Corporate Responsibility <ul><li>Secure higher ESG standards and increase development impacts </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Social and environmental training of Cambodian microfinance institutions </li></ul></ul><ul><ul><li>A paid ESG consultant placed in an invested Central American fund who works with the fund’s holdings </li></ul></ul><ul><ul><li>HIV/ AIDs program for an invested East Africa Fund’s portfolio holdings </li></ul></ul><ul><ul><li>Waste water treatment technology to an industrial company </li></ul></ul><ul><ul><li>An energy conversation study and infrastructure for accessing the electricity network for a hotel that (previously) produced its own electricity using a diesel generator </li></ul></ul><ul><li>The program provides Norfund with an additional tool that it can use to enhance business practices </li></ul>
  14. 14. <ul><li>Norfund has produced development reports for 2007 and 2008 </li></ul><ul><li>Norfund measures and reports complete information on the following development effects: </li></ul><ul><ul><li>Employment (248,000 people ) </li></ul></ul><ul><ul><li>Share of female employees (49 percent) </li></ul></ul><ul><ul><li>Taxes (3.2 billion NOK) </li></ul></ul><ul><li>Relevant development data are collected, measured and reported within each investment areas </li></ul><ul><ul><li>Renewable energy: CO2 reduction, total number of employees, percent of female employees, demonstration effect, effects on competition, diversification effects, infrastructure, suppliers, technology, expertise, training, and HIV/AIDs programs </li></ul></ul><ul><ul><li>Funds: Direct and indirect employment, percent of female employees, equal opportunities, demonstration effects, effects on competition, diversification, training, HIV/AIDs, governance, and anti-corruption programs </li></ul></ul><ul><ul><li>Financial Institutions: Direct employment, percent of female employees, equal opportunities, effects on competition, diversification, training, HIV/AIDs, governance, and anti-corruption programs </li></ul></ul><ul><ul><li>Industrial partnerships: Employment, percent of female employees, equal opportunities, demonstration effect, effects on competition, diversification, training, exports, infrastructure, suppliers, technology, HIV/AIDs, governance, and anti-corruption programs </li></ul></ul><ul><li>Norfund is the only DFI that has measured and reported both quantitative and qualitative development indicators </li></ul>6. Norfund’s Development Effects
  15. 15. 6. Summary <ul><li>Development Finance Institutions stimulate economic growth, combined with </li></ul><ul><li>equitable and sustainable global development </li></ul><ul><li>Norfund’s focused mandate and strategy has yielded competitive returns and </li></ul><ul><li>ensured high development effects </li></ul><ul><li>ESG is an integrated part of Norfund’s operations </li></ul><ul><li>As an active owner, Norfund works with its investments to ensure that its policies are upheld </li></ul><ul><li>and ESG is enhanced. This is often done together with other owners. </li></ul><ul><li>Norfund uses also technical assistance for project development, enhancing and supporting </li></ul><ul><li>projects’ development effects, and CSR related improvements. </li></ul>Norfund does not look for perfect projects or ideal partners, but rather it seeks to secure projects in which its money can make a difference!