ESG Integration in Emerging Markets - CDC's experience

Niclas DuringESG Manager

11 November 2011

CDC’s investments by year end 2010: 930 investments in 70 countries

10%

7%5%

14%

19%

45%

North Africa

Latin America

Other Asia

China

India

Sub-Saharan Africa

8%

10%10%

13%

14%

20%

8%

6% 5%

6%Healthcare

ICT

Energy & Utilities

Industrials

Consumer

Financials

Infrastructure

Mining

Agribusiness

Other

Number of investments

>150

51-150

21-50

11-20

1-10

Investing in Emerging Markets – it takes two to tango…

Why do they think it is their fault?

It’s your faultI’m sure it’s my fault

They will probably do it

I’ve forgotten it already

I’ll bear it in mind

They are impressedThat is clearly nonsense

Very interesting

This is not very important…

The most important point here is…

Oh, incidentally / by the way

He is listening to meI think you are an idiotWith the greatest respect…

What the local thinks they mean

What the British mean

What the British say

Stages of ESG integration and impact on financial returns

Step 5: Corporate strategy-ESG integration

Step 4: Performance management

Step 3: Upside

opportunitiesStep 2:

Downside riskStep 1: Legal

compliance

Basic step: Legal compliance

Case 1: Checking staff HIV/AIDS status

West African biscuit manufacturer

Fund manager discovered during site visit staff being checked for HIV/AIDS status

Process stopped and HIV/AIDS screening now voluntary and confidential

Case 2: Company retaining employee passports

Fund manager due diligence revealed company held foreign contract worker passports for duration of contract

Contravention of ILO standards

100-day phase out plan implemented

Key insights:

Legal breaches discovered during fund manager site visits – active engagement necessary

Legal compliance can be essential to retain license to operate

Reputational risk is considerable

Step 2: Downside risk

Are safe working conditions essential for a business to

operate or is it just for show?

What impact does corporate governance have on company

value at the end of the day?

How important and material can environmental risks really be?

Step 3: Upside opportunities

A fund manager pursued ESG initiatives jointly with a fishing company to enable market expansion:

• Context: Cote d’Ivoire

•The company: Preparation and packing of wholesale and retail fish products

• Upside opportunities:

• Adopted EU regulations on fishing methods and sanitation conditions

• Achieved ISO 9001 and ISO 22000 certification

• Certified by the British Retail Consortium and International Food Standard

• The result: Quality controls have allowed the company to expand to new export markets including Europe and in particular France

Outside CDC’s portfolio: A Fortune 500 company achieved major productivity and risk improvement through targeted health programmes

A large Fortune 500 multinational consumer and personal care products company

More than 150,000 employees and operations in more than 100 countries

ESG opportunity: Improving productivity and reducing operational risk through staff health programmes

Company

Four key health issues identified among the general population – metabolic, cardiovascular, obesity and hypertension matters

Company undertook a two-year pilot in which 545 staff were given health awareness materials assessed against a control group of 1,000 other staff

ESG actions

Obesity: 26% decrease in Body Mass Index at factoryHeart disease: Risk reduction for the highest risk group from 6% to 3%

Productivity: Time not working effectively from 24.5% to 18.2% or £560 per head and year Staff retention: Worker satisfaction and sense of health improved from 43% to 64%Absenteeism: Decreased by 17%

Results

Demystifying financial returns from ESG: A generic process to identify and track ESG financial returns

• Brainstorm and list all conceivable ideas

•Draw on industry guidance where available

• Engage relevant stakeholders to get different perspectives

• Outline impact on operations of each ESG initiative

• Consider specific impact on amount of waste and emissions and use of resources

• Consider impact on productivity, absenteeism, retention

• Select more material and probable ESG risks/opportunities

• Shortlist 5-10 key ESG risks/opportunities

• Develop list of related actions to address risks/opportunities

• Develop KPIs for - costing of each ESG initiative- ESG target, and - financial returns from ESG initiative

•Establish performance management system

•Repeat process regularly

Step 4: Embedding ESG into operations - good ESG management systems matter

Policy and processes 1. Policy2. Identifying opportunities3. Risk rating4. Critical risks5. Action plans6. Monitoring

Roles and responsibilities7. ESG resources8. Senior management responsibility9. ESG specialists10. Staff training

ESG performance management11. Performance indicators12. Serious incidents

Reporting13. Communication lines14. Reporting to investors

Stakeholder management15. Disclosure of information16. Media relations

Step 5: ESG as corporate strategy

A fund manager integrated ESG initiatives into the strategy for its African real estate portfolio. Key features included:

• Guidelines for green buildings: a comprehensive set of guidelines for architects, designers and builders.

• International market standards: facilitating the introduction of international green rating schemes through partnerships with local Green Building Councils.

• Health & safety: guidelines for managers, developers and construction workers on the health and safety systems to be implemented in all its developments.

• Governance: requires partners to sign up to its ESG policies, which include undertakings on governance, business integrity and ethics.

• Training: workshops and ongoing support as required in the implementation and adoption of green building standard

Implementing the strategy:

• The building: One Airport Square

• Location: Accra, Ghana

• Key information: 17,000 square metres of retail, office and car parking space once completed in 2012

• ESG initiatives: Natural ventilation via a central atrium, rain water recycling, concrete overhangs to prevent over-heating and reduce energy consumption

Summary

• Active ownership is essential: While many emerging markets have decent regulatory environments, enforcement capabilities and efficiency and impartiality of court processes can be questionable

• ESG integration goes beyond legal compliance and risks: Comprehensive ESG integration goes further and addresses upside opportunities, formalises processes and is considered in the design of the corporate strategy

• ESG can improve financial returns: Risk (and associated cost) reduction, upside opportunities and performance management can drive significant improvements in free cash flow and the process to identify such opportunities does not have to be complex