CDC's New Toolkit on ESG for Fund Managers

Marie Rosencrantz

Senior Advisor, ESG and Monitoring & Evaluation, CDC

Founder, Rosencrantz & Co

CDC’s Toolkit on ESG for Fund Managers

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CDC is the UK development finance institution with investments through funds focused on the frontier emerging markets

is owned by the UK government through the Department for International Development (DFID)

invests through funds in promising businesses in frontier emerging markets:

75% low income countries

50% sub-Saharan Africa

invests mostly through private equity funds but also in microfinance and debt funds

has £1,411m in portfolio value

65 fund managers in 37 countries

134 funds

794 portfolio companies in 71 countries

£207m total return in 2009

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 offices5-10 offices

2-4 offices

One office

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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

CDC’s Investment Code on ESG:

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”)

The Investment Code also contains CDC’s updated Exclusion List for businesses and activities where CDC’s capital will not be invested

CDC’s Toolkit on ESG for fund managers:

Provides practical guidance for fund managers on how to implement sound ESG management throughout their investment processes

Gives specific guidance for investments in different industry sectors and for different types of funds

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

CDC Toolkit on ESG for Fund Managers

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The business case for ESG features prominently in CDC’s new Toolkit on ESG for fund managers through practical guidance and case examples

There are numerous examples where sound ESG management is a key business success factor

ESG factors – Focus on improvements during the investment period

Environment Social matters

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Strong business case

Business case

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• 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.

• Arch now has 11 production plants with total combined turnover of $185m and employs over 2,300 people.

• Production standards have been improved towards the highest international standards.

• All 11 plants have WHO GMP certification.

• 2 factories are USFDA certified and 3 others expect to qualify shortly.

• 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.

• 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.

Case study 1: Arch PharmaLabs, IndiaInternational business expansion from improved production standards

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• Outsourcing Services Limited (OSL) is a security outsourcing company that supplies security guards for corporate security services in Nigeria.

• 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.

• 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.

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• 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.

• 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.

Case study 2: OSL, NigeriaStart-up security company improved standards and was sold at record price

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CDC’s Toolkit on ESG for fund managers contains 13 Tools

Tools:

1. ESG policies and guidelines

2. ESG management systems for fund managers

3. Considerations for the fund manager’s internal organization

4. Governance: business integrity and good corporate governance

5. Rating ESG risks

6. Key ESG due diligence questions

7. Assessing ESG management systems of investee companies

8. Investment paper and action plan for ESG improvements

9. ESG clauses for investment agreements

10. Monitoring and evaluations

11. ESG reporting to the fund’s investors

12. Information for the public: annual reports & websites

13. ESG considerations for the exit


Adding value through effective environmental, social and governance (ESG) management

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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

Example of a Tool – Guidance on ESG risk ratings for investee companies to help fund managers identify and manage risks

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The Toolkit has 8 Appendices with more specific guidance on selected ESG matters

Appendices:

1. ESG risks & opportunities – industry sector examples

2. ESG management systems for different types of funds: SME, debt, micro-finance

3. International ESG reference standards and conventions

4. Investments from different development finance institutions – comparing standards, procedures & other useful tools

5. Reporting templates and example of an annual ESG report

6. The business case: examples of ESG success stories & lessons learned

7. Climate change considerations

8. Gender considerations – best practices for investors & businesses



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CDC’s fund managers can use the Toolkit to improve ESG management of investee companies throughout their investment processes (1/5)

What to do?

Formal agreement with CDC to commit to the Investment Code on ESG – by CDC’s standard Side Letter or equivalent

Investment strategy in line with CDC’s Exclusion List

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.

Awareness of country / regional ESG risks and opportunities, e.g., countries with weak employment legislation / enforcement

Fund raising – CDC investment

Due diligence

InvestmentInvestment management

ExitInvestment

Toolkit reference:

Tool 1; Appendix 3 & 4

Tool 1 & 2; Appendix 1, 2, 3 & 4

Tool 3, 4 & 5; Appendix 1, 2, 3, 4, 6, 7 & 8

Tool 3, 4 & 5; Appendix 3, 7 & 8

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What to do?

• Assess new investments on ESG matters:

• sector risks

• issues or opportunities to add value

• quality of investee company ESG management systems

• Give new investments a risk rating on ESG matters to determine the appropriate level of management and monitoring


Due diligence


ExitInvestment

Toolkit reference:

Tool 5, 6 & 7; Appendix 1, 2, 3, 4, 6, 7 & 8

Tool 5; Appendix 1, 2, 3, 4, 7 & 8


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What to do?

• Assist portfolio companies to develop action plans to address potential ESG issues identified during due diligence, with appropriate targets and timetable for improvements

• Procure investment undertaking from portfolio companies in line with CDC’s Investment Code on ESG where GPs have effective control or significant influence


Due diligence


ExitInvestment

Toolkit reference:

Tool 8; Appendix 1, 2, 3, 4, 6, 7 & 8



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What to do?

• Encourage managers of portfolio companies to:

• work towards continuous improvements on ESG

• adopt and implement sound ESG policies

• Monitor portfolio companies’ performance on ESG and progress towards action plans

• If ESG issues would arise, assist portfolio companies to address them in a timely manner

• Report annually to CDC and other investors

• Monitor and record any serious ESG incidents in portfolio companies and inform CDC

• Report to the general public


Due diligence


ExitInvestment

Toolkit reference:

Tool 1, 7, 8 & 10; Appendix 1, 2, 3, 4, 6, 7 & 8

Tool 8, 10 & 11; Appendix 6

Tool 10; Appendix 1, 2, 3 & 6


Tool 11; Appendix 5

Tool 12


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What to do?

• Consider ESG matters at divestment:

• any ESG issues with potential buyers?

• will sound ESG practices continue under new owners?


Due diligence


ExitInvestment

Toolkit reference:

Tool 13; Appendix 1, 2, 3, 6, 7 & 8


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The Toolkit is a resource for CDC, fund managers, other development finance institutions and commercial investors

CDC will distribute a printed version of the Toolkit to its fund managers

An electronic version of the Toolkit will be accessible from:

CDC’s website

www.cdcgroup.com

Rosencrantz & Co’s website

www.rosencrantzandco.com

CDC will organize training sessions for its fund managers based on the Toolkit during Q4 2010

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



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• Deacons is a Kenyan retailer which sells clothing, footwear, accessories and home-wares.

• Assisted by an investment from CDC’s fund manager Aureos, Deacons has expanded to now have 19 stores across Kenya, Tanzania and Uganda.

• The company has pioneered an innovative marketing practice by partnering with a breast cancer awareness NGO.

• 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.

• Deacons now has 80% of the Kenyan formal market for female underwear.

Case study 3: Deacons, KenyaGrowing retail in East Africa in partnership with an NGO

CDC's New Toolkit on ESG for Fund Managers

Economy & Finance

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